2010 Accounting, Financial Reporting, and Regulatory Update

Financial Services Industry 

2010 Accounting, 

Financial Reporting, and 

Regulatory Update

Contents 

Foreword 1 

Section 1 

Significant Accounting Developments 2 

Consolidations/Transfers of Financial Assets 2 

Loan Accounting 9 

Accounting for Impairment and TDRs 11 

Fair Value Measurements 18 

Accounting for Financial Instruments — Effects of the FASB’s Proposed ASU 23 

Financial Reporting Implications of the Dodd-Frank Wall Street Reform and Consumer Protection Act 34 

Section 2 

SEC Update and Hot Topics 39 

Introduction 39 

SEC Issues Various Proposed and Final Rules and Interpretations Affecting Financial Reporting 39 

SEC Issues Proposed Rules Addressing Securities and Capital Markets 41 

SEC Finalizes Rules Addressing Securities and Capital Markets 42 

Recent Legislation 44 

SEC Support of Convergence and Global Accounting Standards 45 

Section 3 

FASB and IASB Update 47 

Introduction 47 

FASB Accounting Standard Updates 47 

Proposed FASB Accounting Standard Updates 56 

Joint Projects of the FASB and IASB 58 

IFRS Update 67 

IASB Pending Projects 70 

Section 4 

Asset Management Sector Supplement 77 

Asset Management Accounting Update 77 

Regulatory Sector Supplement — Asset Management 90 

Section 5 

Banking and Securities Sector Supplement 96 

Banking and Securities Accounting Update 96 

Regulatory Sector Supplement — Banking 98 

Regulatory Sector Supplement — Securities 106 

Section 6 

Insurance Sector Supplement 108 

Insurance Accounting Update 108 

Regulatory Sector Supplement — Insurance 113 

i

Section 7 

Real Estate Sector Supplement 119 

Real Estate Accounting Update 119 

Appendix A 

Abbreviations 123 

Appendix B 

Glossary of Topics, Standards, and Regulations 126 

Appendix C 

Deloitte Specialists and Acknowledgments 133 

Appendix D 

Other Resources 136 

Contents: ii

Foreword 

December 2010 

Those of us in the financial services industry have continued to experience challenges and opportunities as 

a result of financial conditions both in the United States and abroad. To help you address such challenges, 

we are pleased to present Deloitte’s annual Accounting, Financial Reporting, and Regulatory Update. We 

hope you’ll find it useful as you enter your year-end reporting cycle. 

This year’s edition outlines accounting, financial reporting, and regulatory updates that have occurred in 

2010 and affect the financial services industry. 

The first few chapters cover developments that are relevant to companies throughout the financial services 

industry. Included are SEC, FASB, IASB, and financial reform updates as well as detailed commentary about 

significant accounting developments. 

The remaining chapters highlight insights targeted to the asset management, banking and securities, 

insurance, and real estate sectors. 

This year’s edition covers developments that took place through the beginning of the fourth quarter. 

We hope you find it to be a useful resource, and we welcome your feedback. Please also visit us at 

www.deloitte.com for more information, and watch for our Heads Up newsletter, to be issued in 

mid-December, covering highlights from the 2010 AICPA National Conference on Current SEC and PCAOB 

Developments. 

As always, we encourage you to contact your Deloitte team for additional information and assistance. 

Jim Reichbach Susan L. Freshour 

Vice Chairman, Financial Services Financial Services Industry Professional Practice Director 

Deloitte LLP Deloitte & Touche LLP 

1

Section 1 

Significant Accounting Developments 

Consolidations/Transfers of Financial Assets 

Introduction 

Over the past few years, the financial services industry has seen substantial changes in the accounting 

for transfers of financial assets and consolidation of VIEs. In June 2009, the FASB issued Statement 166, 

subsequently codified as ASU 2009-16, which amended Statement 140. The FASB concurrently issued 

Statement 167, subsequently codified as ASU 2009-17, which amended Interpretation 46(R). Both ASUs 

have significantly affected entities’ financial statements and business arrangements. 

To recap, ASU 2009-16 removed the concept of a QSPE and required additional clarification about the 

risks that a transferor continues to be exposed to because of its continuing involvement in transferred 

financial assets. Furthermore, ASU 2009-17 replaced Interpretation 46(R)’s risks-and-rewards-based 

quantitative approach to consolidation with a more qualitative approach that requires an entity to have 

the “obligation to absorb losses of . . . or the right to receive benefits from the VIE that could potentially 

be significant to the VIE” along with the “power to direct the activities of a VIE that most significantly 

impact the VIE’s economic performance.” 

When ASU 2009-17 was first issued, many reporting entities hoped that under the ASU’s more 

qualitative approach, they would need to perform less analysis to determine whether an entity should 

be consolidated. Reporting entities initially concentrated on understanding the effect that ASU 2009-17 

would have on their former QSPEs, which would no longer be outside the scope of ASU 2009-17. 

However, reporting entities have found that the initial adoption of ASU 2009-17 is more time-consuming, 

since entities previously not deemed to be VIEs under Interpretation 46(R) are now considered VIEs under 

the new guidance. For example, certain entities, such as limited partnerships that contained simple 

majority kick-out rights to remove the general partner without cause, were not considered VIEs before the 

adoption of ASU 2009-17. However, under the new guidance, the limited partnership could potentially be 

a VIE if the kick-out rights are not unilaterally held by one party. 

To lessen the burden for certain entities, on January 27, 2010, the FASB voted to finalize ASU 2010-10, 

which deferred the effective date of ASU 2009-17 for a reporting entity’s interest in certain entities and 

for certain money market mutual funds. 1 ASU 2010-10 addressed concerns that (1) the joint consolidation 

model under development by the FASB and the IASB may result in different consolidation conclusions 

for asset managers and (2) an asset manager consolidating certain funds would not provide useful 

information to investors. 

Although the effects of ASU 2009-17 on ASC 810-10 and the financial services industry have received 

the most media attention, the implications of ASU 2009-17 were felt in nearly every industry, including 

energy and resources, hospitality and tourism, manufacturing, and retail. Specifically, the banking and 

securities industries experienced a more than twelve-fold increase in the percentage of consolidated 

VIE assets to total assets after the first quarter of 2010 (when adoption of the standard was required). 2 

This extraordinary increase in consolidated VIEs contributed to an assortment of implementation and 

operational issues. 

This section addresses key implementation issues, as well as some operational and financial statement 

concerns, related to the adoption of ASU 2009-16 and ASU 2009-17. Some of the upcoming FASB and 

IASB projects associated with these standards are also highlighted. 

1 See Deloitte’s January 27, 2010, Heads Up, “FASB Votes to Finalize Deferral of Statement 167 for Certain Investment Funds.” 

2 See Deloitte’s May 2010 report, “Back On-Balance Sheet: Observations From the Adoption of FAS 167.” 

Section 1: Significant Accounting Developments 2

General Implementation Issues Related to ASU 2009-16 

Some implementation issues have arisen as a result of ASU 2009-16’s introduction of the concept of 

a participating interest. Many financial institutions transfer (participate) a portion of individual loans to 

other financial institutions to limit credit risk or provide liquidity. Loan participations frequently contain 

terms that entities must carefully evaluate to determine whether the transferred portions of a loan are 

participating interests. ASU 2009-16 defined “participating interests” and clarified that sale accounting 

is precluded for transfers of portions of financial assets that do not meet this definition. Entities must 

evaluate transfers of portions of financial assets that meet the definition of a participating interest under 

ASC 860-10-40-6A to determine whether derecognition under ASC 860-10-40-5 is appropriate. 

Financial institutions often issue participations in loans they have originated, and entities look to the 

guidance on transfers of financial assets to account for those transactions appropriately. To satisfy the 

definition of a participating interest, transfers of financial assets must meet certain requirements, including 

the following: 

• Pro rata ownership interest is in the entire asset transferred. 

• Proportionate division of all cash flows received from the underlying financial asset is in an 

amount equal to the ownership share. 

• The rights of each participating interest holder have the same priority; no one interest holder’s 

interest is subordinate to others. 

• No party has the right to pledge or exchange the underlying financial assets unless all 

participating interest holders agree. 

For example, consider the impact of the concept of participating interests on the accounting for transfers 

involving asset-backed CP conduits. Generally, the transferor transfers financial assets to a bankruptcyremote 

entity that will then transfer assets, or interests in assets, to the CP conduit. If an entity transfers 

a portion of trade receivables to a CP conduit, it must perform an analysis to determine whether the 

interests transferred represent participating interests. In pro rata participation, the conduit and transferor 

are each entitled to their specified portion of all cash flows collected. 

Assume that trade receivables pool 1 and trade receivables pool 2 are transferred to a CP conduit. Each 

pool has a par value of $50, and the $100 total value of assets purchased by the CP conduit is funded 

with $80 of CP issued by the conduit. In an 80 percent pro rata participation, if $45 is collected on pool 1 

and $5 is collected on pool 2, the CP conduit is entitled to $40 (80 percent of the total of $50 collected) 

and the transferor receives $10 for its pro rata participation in the assets. 

If all the criteria of a participating interest are met, the entity would derecognize the participating interest 

only after performing the traditional sale accounting analysis. 

General ASU 2009-17 Implementation Issues 

One of the most arduous tasks entities faced in applying ASU 2009-17 was determining whether to 

consolidate their VIEs. 3 Before making this determination, entities needed to consider a series of other 

issues. 

3 See footnote 2. 


This section highlights some of the key implementation issues associated with ASU 2009-17 that have 

arisen over this past year and includes discussion of the following questions: 

• Does the entity qualify for the FASB’s recently issued deferral? 

• How does the entity now evaluate the service provider fees in determining the primary 

beneficiary? 

• What are the most significant activities of the VIE? 

• Is the entity the primary beneficiary of the VIE under the new requirements? 

• What is the effect of kick-out rights in the new VIE consolidation analysis? 

Does the Entity Qualify for the FASB’s Recently Issued Deferral? 

ASU 2010-10 defers the application of ASU 2009-17 for a reporting entity’s interest in an entity if all the 

following conditions are met: 

• The entity either (1) has all of the attributes specified in ASC 946-10-15-2(a)–(d) 4 or (2) is an entity 

whose industry practice is to apply guidance that is consistent with the measurement principles in 

ASC 946 for financial reporting purposes. 

• The reporting entity does not have an obligation to fund losses of the entity that could potentially 

be significant to the entity. In evaluating this condition, entities should consider implicit or explicit 

guarantees provided by the reporting entity and its related parties, if any. 

• The entity is not a securitization entity, an asset-backed financing entity, or an entity that was 

formerly considered a QSPE. 

Examples of entities that may satisfy the conditions of the deferral include, but are not limited to, mutual 

funds, hedge funds, private equity funds, mortgage real estate investment funds, and venture capital 

funds. The FASB noted that the examples in the implementation guidance in ASU 2009-17 would not be 

modified as a result of the ASU’s amendments and that an entity whose characteristics are consistent with 

the characteristics of a VIE outlined in ASU 2009-17’s implementation guidance should not be subject to 

the deferral. 5 

How Does the Entity Now Evaluate the Service Provider Fees in Determining the Primary 

Beneficiary? 

One topic that received much attention involved service providers (e.g., fund managers, master servicers) 

and how to evaluate whether the fee they received that was identified as a variable interest under 

ASC 810-10-55-37 would be potentially significant under ASC 810-10-25-38A(b). The consensus was 

that it would depend on which of the six criteria in ASC 810-10-55-37 caused the fee to be a variable 

interest, the quantitative criteria in (c), (e), or (f) or the more qualitative criteria in (a), (b), or (d). If the 

quantitative conditions result in the fee’s being considered a variable interest (i.e., the anticipated fee 

4 The attributes are as follows: 

a. Investment activity. The investment company's primary business activity involves investing its assets, usually in the securities of other entities 

not under common management, for current income, appreciation, or both. 

b. Unit ownership. Ownership in the investment company is represented by units of investments, such as shares of stock or partnership interests, 

to which proportionate shares of net assets can be attributed. 

c. Pooling of funds. The funds of the investment company's owners are pooled to avail owners of professional investment management. 

d. Reporting entity. The investment company is the primary reporting entity. 



absorbs more than an insignificant amount of the expected residual returns of the VIE), the fee generally 

would be presumed to be “potentially significant” under ASC 810-10-25-38A(b). However, if the more 

qualitative conditions result in the fee’s being considered a variable interest (e.g., a loan servicer receives 

a subordinate fee of 5 basis points, which is deemed to be a market-based fee at the time of the analysis, 

and the servicer does not hold any other beneficial interests), that fee may not necessarily result in a 

variable interest that is potentially significant to the VIE. A reporting entity generally must use judgment 

in making such determinations, and the outcome of the analysis varies on the basis of the facts and 

circumstances. 

What Are the Most Significant Activities of the VIE? Is the Entity the Primary Beneficiary 

of the VIE Under the New Requirements? 

Many entities initially struggled with this new qualitative model and desired to apply thresholds or bright 

lines to determine whether to consolidate a VIE. This desire to apply a more quantitative analysis was 

fueled by the term “significant,” as used in ASC 810-10-25-38A(b) with respect to the determination of a 

primary beneficiary. Questions arose about what amount or percentage would be considered significant 

and about whether different thresholds were associated with significance and insignificance (the term 

“insignificant” is introduced in the determination of whether a servicing fee is a variable interest under 

ASC 810-10-55-37). As practice and guidance developed, entities began focusing more on the qualitative 

aspects of their economic involvements rather than relying strictly on quantitative measures to determine 

significance. The SEC suggested a need for both a qualitative and a quantitative analysis to support a 

conclusion regarding significance. Arie S. Wilgenburg made the following remarks at the 2009 AICPA 

Conference: 6 

[S]imilar to how we have talked in the recent past about materiality assessments being based on the 

total mix of information, we believe that assessing significance should also be based on both quantitative 

and qualitative factors. While not all-inclusive, some of the qualitative factors that you might 

consider when determining whether a reporting enterprise has a controlling financial interest include: 

1. The purpose and design of the entity. What risks was the entity designed to create and pass 

on to its variable interest holders? 

2. A second factor may be the terms and characteristics of your financial interest. While the 

probability of certain events occurring would generally not factor into an analysis of whether a 

financial interest could potentially be significant, the terms and characteristics of the financial 

interest (including the level of seniority of the interest), would be a factor to consider. 

3. A third factor might be the enterprise’s business purpose for holding the financial interest. For 

example, a trading-desk employee might purchase a financial interest in a structure solely for 

short-term trading purposes well after the date on which the enterprise first became involved 

with the structure. In this instance, the decision making associated with managing the 

structure is independent of the short-term investment decision. This seems different from an 

example in which a sponsor transfers financial assets into a structure, sells off various tranches, 

but retains a residual interest in the structure. 

As previously mentioned this list of qualitative factors is neither all-inclusive nor determinative and the 

analysis for a particular set of facts and circumstances still requires reasonable judgment. 

The next challenge was to determine the most significant activities of a VIE and who had the power over 

those activities. This determination largely depended on the nature and design of the entity. For certain 

entities, such as certain securitization structures involving beneficial interests in one type of collateral, the 

analysis was fairly straightforward. For others, such as operating partnerships or joint ventures, the analysis 

was contingent on the specific design and operations of the entity. 

6 Speech by SEC Staff: Remarks before the 2009 AICPA National Conference on Current SEC and PCAOB Developments by Arie S. Wilgenburg, 

December 7, 2009. 


In addition, this analysis has been particularly challenging for arrangements in which one party is exposed 

to the significant risks and rewards of a VIE yet does not appear to have the power to direct the most 

significant activities of the VIE. The FASB added language to ASU 2009-17 that requires the exercise 

of additional skepticism when the relative economic interests of the parties to an arrangement are 

inconsistent with the stated power of each of these parties. Further, the SEC staff has publicly commented 

on multiple occasions that it will scrutinize the accounting for arrangements that lack economic substance 

or appear to be motivated by a desire to deconsolidate. 

What Is the Effect of Kick-Out Rights in the New VIE Consolidation Analysis? 

Also frequently debated was a question regarding a provision in ASU 2009-17 under which a single party 

must be able to exercise kick-out rights, or participating rights, for these rights to be considered in the 

consolidation analysis. In particular, one question that came up was whether the ability of the board of 

directors to remove a manager or other party with power over the significant decision making would 

be considered to be power held by a single party. A practice has emerged in which a board of directors 

is an extension of the equity investors and therefore does not constitute a single party for ASU 2009-17 

purposes unless a single equity investor (or related-party group of equity investors) controls representation 

on the board of directors (i.e., has more than 50 percent representation on a board that requires a simple 

majority vote, thereby indirectly controlling the board’s vote). 

Operational Issues 

Once entities identified which VIEs required consolidation, they soon focused on the operational aspects 

of consolidation for the first time. The following are just a few of the operational challenges entities have 

faced: 

• Need for additional dedicated resources. 

• Access to necessary financial information on a timely basis. 

• Need for development of additional internal controls. 

Depending on the type of entity applying ASU 2009-17 and its involvements and variable interests held, 

the implementation may have taken just a few days or it may have equated to many grueling hours with 

a large number of dedicated resources (e.g., employees, consultants, auditors). For some companies, 

the consolidation of new VIEs may have been simple enough to perform by using a spreadsheet tool. 

For others, it may have involved significant systems modifications or upgrades to facilitate an expanded 

consolidation process. 

Another operational challenge that entities have been dealing with is access to the necessary financial 

information on a timely basis. Many entities have used a reporting lag in consolidating their VIEs (i.e., 

they have used February VIE information for a March quarter-end consolidation) while monitoring for any 

material events occurring during the lag period. ASC 810-10-45-12 states that it “ordinarily is feasible for 

the subsidiary to prepare, for consolidation purposes, financial statements for a period that corresponds 

with or closely approaches the fiscal period of the parent.” ASC 810-10-45-12 further states that as long 

as the fiscal-year-end dates of the parent and subsidiary are not more than three months apart, it would 

be acceptable to use the subsidiary’s financial statements for its fiscal period. Similarly, the SEC states that 

the difference cannot be more than 93 days (see SEC Regulation S-X, Rule 3A-02) and that the entity must 

disclose both the closing date for the subsidiary and the factors supporting the parent’s use of different 

fiscal-year-end dates. 


Although the guidance does not specify when different fiscal-year-end dates would be appropriate, a 

parent should always be able to support its conclusion. For example, a calendar-year parent may have its 

subsidiary use a November 30 year-end simply to ensure that the subsidiary’s financial information is fully 

compiled, reliable, and available to include in the parent’s annual financial statements. 

The parent should also evaluate material events occurring during any reporting time lag (i.e., the period 

between the subsidiary’s year-end reporting date and the parent’s balance sheet date) to determine 

whether the effects of such events should be disclosed or recorded in the parent’s financial statements. 

Under ASC 810-10-45-12 and Regulation S-X, Rule 3A-02, “recognition should be given by disclosure 

or otherwise to the effect of intervening events that materially affect the [parent’s] financial position or 

results of operations.” 7 

Furthermore, securitization vehicles have historically been strictly cash flow vehicles and were never 

required to prepare separate financial reports under U.S. GAAP. The creation of initial U.S. GAAP financial 

statements for these entities, and the supporting footnote disclosures, presented another challenge and 

required significant time and resources. 

Public companies that are required to consolidate an entity may also face challenges from a Sarbanes- 

Oxley control perspective to the extent that the financial information processing was outside their control 

(i.e., the structure of CDOs or CLOs depended on trustee reports). Entities may have relied on SAS 70 

reports or developed other control processes to gain sufficient comfort with the financial information. 

The CAQ also recently issued an alert that provides the SEC staff’s views on ICFR requirements for entities 

newly consolidated under ASU 2009-17. Such considerations include the requirement for companies to 

consider ICFR for the consolidated entity. The SEC staff believes that registrants will most likely have the 

right or authority to assess internal controls of the consolidated entity, and since consolidation will occur 

as of the first day of the fiscal year, registrants will have sufficient time to perform such an assessment. 

An entity can consider the following when assessing ICFR for newly consolidated entities: 

• Proper segregation of duties for financial reporting purposes. 

• Appropriate procedures for review of financial reporting packages. 

• Consistent application of accounting policies across reporting entities. 

Financial Statement Presentation Issues 

The measurement of assets and liabilities now presented on the balance sheet as a result of the 

application of ASU 2009-17 has been another source of contemplation for preparers. Under the ASU, 

an entity can choose, upon initial adoption, to measure the assets and liabilities being consolidated (1) 

at their carrying amounts, (2) at the UPB for lending-related activities, (3) at their initial fair value (with 

subsequent measurements based on the application of the relevant GAAP for those assets or liabilities), 

or (4) by election of the FVO. Of a 40-entity sample, 43 percent selected the carrying amount, 23 percent 

elected the FVO, 7 percent selected the UPB, and 27 percent elected a combination of methods. 8 This 

section will highlight a presentation issue that asset managers experienced this past year. 

Many asset managers who consolidate CFEs will elect the FVO to mitigate the potential income statement 

volatility that could occur under the carrying amount transition methods in ASC 810-10-65-2. Under those 

methods, subsequent impairments on the assets held by a CFE would not be offset by recognition of 

declines in fair value of the beneficial interests issued by the CFE. 

7 For additional information, see 810-10-45 (Q&A 06), “Parent and Subsidiary With Different Fiscal-Year-End Dates” (available on Technical Library: 

The Deloitte Accounting Research Tool). 



Asset managers that have elected the FVO have generally concluded that upon initial adoption of ASU 

2009-17, the aggregate fair value of the assets in the CFE exceeds the aggregate fair value of the CFE’s 

beneficial interest (liabilities). Even though the liabilities are nonrecourse obligations, this situation may 

occur as a result of the valuation premise and market participant guidance in ASC 820. In particular, the 

market participant exit prices for the CFE’s beneficial interests often contain liquidity discounts that are not 

inherent in the market participant exit prices for the CFE’s assets. In addition, there may not be a perfect 

correlation between the duration of the assets and liabilities of the CFE. 

Accounting for the excess of the fair value of the assets over the fair value of the liabilities of a CFE 

presents a challenge and could result in the following effects on the financial statements of the 

consolidated entity that includes the asset manager: 

1. Upon initial adoption of ASU 2009-17, equity of the parent is increased by the excess of the 

fair value of the CFE’s assets over its liabilities in accordance with the transition guidance in ASC 

810-10-65-2(c). 9 

2. In subsequent financial reporting periods, the net change in fair value of the financial instruments 

of the CFE would be reflected as income or loss of the consolidated entity that includes the asset 

manager. Although the net change could be income or loss in any financial reporting period, the 

net change over the remaining life of the CFE would result in a loss. 

This way of accounting caused great concern for entities consolidating these structures, since the 

financial reporting did not reflect the economics of the transaction and resulted in a presentation 

difficult for investors to understand. Essentially, the above accounting would result in a consolidated 

entity that includes all income and loss (and associated volatility) in its income statement for which it 

is not economically exposed. That is, if the asset manager’s involvement with the CFE is limited to a 

management fee, a portion (or all) of the CFE’s periodic net income or loss will have economic effects that 

are either beneficial or detrimental to the third-party beneficial interest holders, but it would nevertheless 

be reflected as net income or loss of the consolidated entity that includes the asset manager. In addition, 

the reversal of the initial amount recorded to retained earnings (i.e., over time as the values of the assets 

and beneficial interests converge) would result in the asset manager’s recognizing less income than its 

actual management fees. 

The question was raised with the staff of the SEC’s Office of the Chief Accountant. The staff 

communicated that it would not object to an appropriation of retained earnings related to the transition 

adjustment from adoption. In addition, the staff stated that it would object to exclusion, in future periods, 

of any of the changes associated with these variable interest entities from the consolidated net income 

or loss of the consolidated entity. However, the staff would not object to an appropriate attribution of 

the periodic net income or loss between the asset manager (parent interests) and the beneficial interest 

holders (noncontrolling interests) as an allocation to noncontrolling interest holders, with a corresponding 

adjustment to the amount of the appropriated retained earnings. 

For additional details on implementation and operational issues, see Deloitte’s May 2010 report, “Back 

On-Balance Sheet: Observations From the Adoption of FAS 167.” 

Looking Ahead — Convergence Project 

The FASB and IASB have been jointly developing a comprehensive consolidation model for all entities 

(both voting interest entities and VIEs). The basis for the consolidation focuses on control, which is defined 

9 ASC 810-10-65-2(c) states, “Any difference between the net amount added to the balance sheet of the consolidating entity and the amount of any 

previously recognized interest in the newly consolidated VIE shall be recognized as a cumulative effect adjustment to retained earnings.” 


as having the following elements: (1) power over the entity, (2) exposure/rights to variable returns from its 

involvement with the entity, and (3) the ability to use its power over the entity to affect the amount of the 

reporting entity’s returns. 

The IASB has completed its deliberations separately from the FASB and plans to issue a final standard by 

the end of 2010. The FASB will consider U.S. stakeholder input on the IASB’s published staff draft and, 

on the basis of this input, determine whether it will issue an ED that is consistent with the IASB’s final 

standard. 

Looking Ahead — Repurchase Transactions 

The FASB is currently working on a project to improve the accounting for repurchase transactions by 

amending the “effective control” criteria for transactions involving repurchase agreements or other 

agreements that both entitle and obligate the transferor to repurchase or redeem financial assets before 

their maturity. ASC 860 states that if a transferor maintains effective control over financial assets, it is 

precluded from accounting for the transfer of financial assets as a sale; rather, it must account for the 

transfer as a secured borrowing. 

In particular, a transferor maintains effective control over transferred financial assets if there is a 

repurchase agreement that both entitles and obligates the transferor to repurchase financial assets before 

their maturity. ASC 860 also provides a criterion that indicates that a transferor maintains effective control 

over a financial asset when the transferor is able to purchase or redeem the financial asset on substantially 

agreed terms, even in the event of default by the transferee. To comply with this criterion, the transferor 

must maintain cash or sufficient collateral to fund substantially all the cost of purchasing replacement 

financial assets from others. 

The FASB tentatively decided to remove this “cash collateral” criterion a transferor uses to determine 

whether a transfer of financial assets within a repurchase agreement is to be accounted for as a sale or as 

a secured borrowing. The Board has concluded its deliberations on this project and expects to issue an ED 

in the fourth quarter of 2010. 

Loan Accounting 

Introduction — New Guidance 

The FASB issued two ASUs in 2010 that affect registrants with loan receivable portfolios. On April 29, it 

released ASU 2010-18, which provides guidance on whether an entity should remove a modified loan that 

constitutes a TDR under ASC 310-40 from a pool of loans accounted for as a single asset under 

ASC 310-30. 

On July 21, the Board issued ASU 2010-20, which amends ASC 310 by requiring more robust and 

disaggregated disclosures about the credit quality of an entity’s financing receivables and its allowance for 

credit losses. The disclosure amendments apply to all entities with financing receivables, whether public 

or nonpublic. A financing receivable is defined as a contractual right to receive money on demand, or on 

fixed or determinable dates, that is recognized as an asset in the entity’s statement of financial position. 

Examples of financing receivables include (1) loans, (2) trade accounts receivable, (3) notes receivable, (4) 

credit cards, and (5) lease receivables (other than operating leases). The amended disclosure guidance 

does not apply to short-term trade accounts receivable or receivables measured at (1) fair value, with 

changes in fair value recorded in earnings, or (2) lower of cost or fair value. It also excludes from its scope 

debt securities, unconditional promises to give, and beneficial interests in securitized financial assets. 


Implementation Considerations 

ASU 2010-18 

ASU 2010-18 establishes that entities should not evaluate whether a modification of loans (that are part 

of a pool accounted for under ASC 310-30) meets the criteria for a TDR in ASC 310-40. In addition, 

modified loans should not be removed from the pool unless any of the criteria in ASC 310-30-40-1 are 

met. Entities are allowed a one-time election to change the unit of accounting from a pool basis to an 

individual loan basis. Such an election would be applied on a pool-by-pool basis. This would allow entities 

that have elected to apply the guidance in ASC 310-40 on troubled debt restructurings to future loan 

modifications. The ASU is effective prospectively for any modifications of a loan or loans accounted for 

within a pool in the first interim or annual reporting period ending after July 15, 2010. 

Registrants should be aware that the FASB’s proposed ASU on accounting for financial instruments (see 

Section 3) contains a requirement to remove modified loans that constitute TDRs under ASC 310-40 from 

a pool of loans, contrary to ASU 2010-18. Accordingly, entities may be required to change their practice in 

the future if the proposed ASU is finalized as exposed. 


Under ASU 2010-20, at the portfolio segment level, an entity is only required to provide disclosures 

about the allowance for credit losses related to financing receivables and qualitative information related 

to modifications of financing receivables. The ASU defines a portfolio segment as the “level at which an 

entity develops and documents a systematic methodology to determine its allowance for credit losses.” 

For example, a portfolio segment may be defined by the different types of financing receivables (e.g., 

mortgage loans, auto loans), the industry to which the financing receivable relates, or the differing risk 

ratings. All other disclosures required by the ASU are to be provided by class of financing receivable, which 

is generally a disaggregation of a portfolio segment and is determined on the basis of the nature and 

extent of an entity’s exposure to credit risk arising from financing receivables. At a minimum, classes of 

financing receivables must be first (1) segregated on the basis of the measurement attribute (amortized 

cost and present value of amounts to be received) and then (2) disaggregated to the level that an entity 

uses when assessing and monitoring the risk and performance of the portfolio (including the entity’s 

assessment of the risk characteristics of the financing receivables). For example, a loan portfolio may first 

be disaggregated into classes on the basis of whether the loans were initially measured at amortized cost 

or purchased credit impaired. The loan portfolio may then be further disaggregated into commercial, 

consumer, and residential because such classes best reflect different risk characteristics and are consistent 

with the method the entity uses to monitor and assess loan portfolio credit risk. 

The ASU’s new and amended disclosure requirements focus on the following five topics: (1) nonaccrual 

and past due financing receivables, (2) allowance for credit losses related to financing receivables, 

(3) loans individually evaluated for impairment, (4) credit quality information, and (5) modifications. For a 

detailed list of new and amended disclosure requirements see Deloitte’s July 22, 2010, Heads Up on ASU 

2010-20. In preparation for their first filings under the new and amended disclosure requirements, entities 

should consider any data collection issues that may arise as they gather information for reporting both 

the period-end balances as well as the activity that occurs during a reporting period. Note, however, that 

on December 9, 2010, the FASB issued a proposed ASU to defer the effective date in ASU 2010-20 for 

disclosures about TDRs by creditors until the FASB finalizes its project on determining what constitutes a 

TDR for a creditor (see the Accounting for Impairments and TDRs section below for more information on 

this project). If redeliberations of both the proposed ASU and the Board’s TDR clarifications project go as 

the Board expects, the deferral of ASU 2010-20 disclosures will only last a single quarter for public entities 


with calendar year-ends. This is because the deferred disclosures will be reinstated as part of the TDR 

clarifications project, which is expected to be effective for interim and annual periods ending after June 

15, 2011, for public entities. 

With respect to the effective date, for public entities, the new and amended disclosures about information 

as of the end of a reporting period will be effective for the first interim or annual reporting periods 

ending on or after December 15, 2010. That is, for calendar-year-end public entities, most of the new 

and amended disclosures in the ASU would be effective for this year-end reporting season. However, the 

disclosures that include information about activity that occurs during a reporting period will be effective 

for the first interim or annual periods beginning after December 15, 2010. Those disclosures include 

(1) the activity in the allowance for credit losses for each period and (2) disclosures about modifications 

of financing receivables. For calendar-year-end public entities, those disclosures would be effective for the 

first quarter of 2011. 

For public entities that do not have a calendar-year-end, the effective date of the ASU becomes more 

complicated. For example, a public entity that has a June 30 year-end would be required to provide the 

new and amended disclosures about information as of the end of the reporting period in its financial 

statements for the second quarter ended December 31, 2010. In addition, the new and amended 

disclosures that include information about activity that occurs during a reporting period will be effective as 

of the beginning of the public entity’s third quarter ended March 31, 2011 (i.e., January 1, 2011). 

For nonpublic entities, all disclosures will be required for annual reporting periods ending on or after 

December 15, 2011. That is, for calendar-year-end nonpublic entities, the new and amended disclosures 

in the ASU would be effective for the next year-end reporting season. Comparative disclosure for earlier 

reporting periods that ended before initial adoption is encouraged but not required. However, the ASU 

requires entities to provide comparative disclosures for reporting periods that end after initial adoption. 

Accounting for Impairment and TDRs 

A recent Wall Street Journal article, “To Fix Sour Property Deals, Lenders ‘Extend and Pretend,’” 10 

highlights how some believe that loan modifications are being used to potentially defer losses. The 

article notes that the “concern is that rampant modification of souring loans masks the true scope of the 

commercial property market weakness, as well as the damage ultimately in store for bank balance sheets.” 

Nevertheless, loan modifications are commonly used by banks and financial institutions as a strategy to 

prevent foreclosure, make houses affordable to people in hardship, and mitigate losses in the long term. 

Both residential and commercial loan restructurings are receiving significant attention lately, as the 

credit crunch continues to affect the broader global economy. The article states that restructurings of 

nonresidential loans stood at $23.9 billion at the end of the first quarter of 2010, more than three times 

the level a year earlier and seven times the level two years earlier. The increase in the number of loan 

modifications and workouts 11 has raised concerns about whether changes to current accounting guidance 

are needed to help lenders account for TDR 12 and especially to help them determine whether a loan 

modification is a TDR and how to measure the impairments. 

10 Carrick Mollenkamp and Lingling Wei, “To Fix Sour Property Deals, Lenders ‘Extend and Pretend,’” Wall Street Journal, July 7, 2010. 

11 One common loan modification program is the U.S. Treasury’s Home Affordable Modification Program (HAMP). 

12 A loan modification may be accounted for as a TDR if both (1) the debtor is experiencing financial difficulties and (2) for economic or legal reasons, 

a creditor grants a concession (i.e., the borrower’s effective borrowing rate on the modified loan is less than the effective rate of the loan before the 

modification) to a debtor that it would not otherwise consider. 


The discussion below reviews some basics of TDR accounting under existing U.S. GAAP and addresses 

accounting developments in TDR and impairment that took place in 2010. 

TDR Decision Tree 

ASC 470-60-55-7–9 

ASC 470-60-55-11–14 

Receipt of assets in full 

satisfaction of the loan. 

ASC 310-40-40-2-4 

Recognize a 

gain or loss on 

restructuring. 

Is the debtor 

experiencing 

financial 

difficulty? 

Yes 

Did the 

company grant a 

concession? 

Yes 

What type of 

TDR does the 

modification fall 

under? 

No 

Measure for 

impairment as 

per ASC 310-10. 

The modification is not a TDR 

and should be accounted for 

under ASC 310-20, ASC 310- 

20-35-11 and ASC 470-50. 

Is the 

modification more 

than minor according 

to ASC 310-20-35-11? 

ASC 310-20-35-11 

ASC 310-20-35-9 

Continuation of old loan. 

Carry forward previous basis 

adjustments. 

ASC 310-20-35-10 

Section 1: Significant Accounting Developments 12 

No 

Modification of the 

loan terms. 

ASC 310-40-35-5 

Yes 

Extinguishment of old loan 

and recognition of new loan. 

Recognize into income any 

previous basis adjustments 

and defer any new fees or 

costs. 

The following diagram (presented from the perspective of a creditor) is intended to help entities determine 

when loan modifications are considered TDRs and what related accounting guidance they should apply. 

Under current accounting guidance, when a loan modification is deemed a TDR, the financial institution 

must recognize an impairment charge in earnings, calculated on the basis of the difference between 

the present value of the modified cash flows, by using the EIR of the original loan and the financial 

institution’s recorded investment in the loan. Under this approach, the impairment charge would not 

necessarily reflect the full fair value deterioration of the loan because the impairment does not take 

No

into account the fair value of the loan or the fair value of the underlying mortgage property. Thus, a 

modification of the terms of a loan may sometimes have far less of an effect on the financial statements 

than the true fair value deterioration of the loan. In addition, a creditor may avail itself of a practical 

expedient. As indicated in ASC 310-10-35-22, “as a practical expedient, a creditor may measure 

impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is a 

collateral dependent loan.” 

Financial institutions may modify loans for numerous reasons and in numerous ways. In accordance 

with ASC 470-60, no single characteristic or factor can be used alone in the determination of whether 

a modification is a TDR. In addition, because there is inadequate implementation guidance on loan 

impairments, the identification of TDRs can involve subjectivity. Furthermore, ASC 310-40-15-9 notes 

that TDRs can take a variety of forms and accordingly the industry practice of applying U.S. GAAP varies 

among financial institutions and lacks consistency. As a result, there are significant accounting and audit 

risks in the application of TDRs and impairments, and in 2010 the industry continues to face the challenge 

of assessing whether a modification represents a TDR. 

Three areas in which financial institutions commonly experience difficulty in the implementation of TDR 

accounting under U.S. GAAP are (1) identification of TDRs by lenders, (2) impairment methods, and (3) 

income recognition on impaired loans. 

Identification of TDRs by Lenders 

On July 14, 2010, the FASB added a project to its agenda to provide additional implementation guidance 

to assist lenders in determining whether a loan modification constitutes a TDR. The addition of this project 

to the FASB’s agenda was in response to concerns raised by certain constituents, including the SEC and 

banking regulators, that such guidance was warranted given the significant increases in loan modifications 

being made by lenders in the current economic environment. 

On October 12, 2010, the FASB issued a proposed ASU, Clarifications to Accounting for Troubled Debt 

Restructurings by Creditors, to help lenders achieve more consistent identification of TDRs. The proposed 

ASU would be effective for interim and annual periods ending after June 15, 2011. Retrospective 

application would be required for certain disclosures (see further discussion below on the effect of the 

proposed ASU on disclosures). Comments on the proposed ASU are due by December 13, 2010. 

The proposed ASU clarifies the current accounting framework for TDRs. The discussion below focuses on 

how the FASB’s proposed changes to TDR accounting address the implementation challenges related to 

(1) when a modification constitutes a concession, (2) the concept of “financial difficulty,” (3) the concept 

of “insignificant delay” in payment or shortfall of amount, and (4) updated disclosure requirements. 13 

When a Modification Constitutes a Concession 

Identifying TDRs is complicated by the fact that under U.S. GAAP, different approaches are used for 

creditors and debtors to identify whether a concession has been granted. Debtors are directed to use an 

effective rate test under which the original EIR is compared with the postmodification EIR. 

In contrast, under U.S. GAAP there are examples of TDRs for creditors, but a concession test is not 

required. In fact, in the FASB’s proposed ASU, the Board stated that the effective rate test is only meant to 

be used by the debtor. Creditors would need to consider whether a reduction in the EIR of the debt was 

made to reflect a decrease in market rates or to grant a concession. For example, the lender may reduce 

the interest rate on a loan primarily to reflect a decrease in market interest rates to maintain a relationship 

13 For more information, see Deloitte’s October 15, 2010, Heads Up. 


with a borrower that can readily obtain a loan from another lender under similar loan terms. This would 

not be considered a TDR. Financial institutions face the challenge of creating an effective policy to 

identify when a concession is considered granted. It can be particularly difficult to determine whether the 

modified terms are at or above market terms (not a concession) or below market terms (a concession) 

when there are no active markets to refer to. In response to these and other similar challenges, the FASB’s 

proposed ASU provides the following clarifications: 

• Creditors should be explicitly precluded from using the borrower’s effective rate test in their 

evaluation of whether a loan is a TDR. 

• A situation in which a market interest rate is not readily available is a strong indicator that the 

modification was executed at a rate that is below market and that a concession may have been 

granted. 

• A modification that results in a temporary or permanent increase to the contractual interest rate 

cannot be presumed to be at a rate that is at or above market. 

The Concept of Financial Difficulty 

Numerous factors indicate that a debtor is experiencing financial difficulty. ASC 470-60-55-8 notes that 

these factors can include: 

• Default. 

• Bankruptcy. 

• Doubt about whether the debtor will continue as a going concern. 

• Delisting of securities. 

• Insufficient cash flows to service debt. 

• Inability to obtain funds from other sources at a market rate for similar debt to a nontroubled 

borrower. 

Lenders must exercise professional judgment in assessing financial difficulty, which can lead to diversity in 

practice. For example, credit score and valuation of underlying collateral are both acceptable approaches 

to identifying financial difficulty within the existing accounting framework established by the FASB. 

The FASB’s proposed ASU clarifies the concept of “financial difficulty.” Recent interagency regulatory 

interpretive guidance makes a useful distinction between borrowers that are experiencing financial 

deterioration and those that are experiencing financial difficulty. According to an August 25, 2010, Board 

meeting handout, the focus of the regulatory guidance is that a borrower’s inability to service debt is a 

primary indicator of financial difficulty. Accordingly, a borrower that is not currently in default may still be 

experiencing financial difficulty (i.e., default may be probable even if all contractual payments are being 

made as scheduled. For example, a borrower with an adjustable rate mortgage (ARM) loan may make all 

of its scheduled payments when a loan is still at its “teaser” rate. Nonetheless, it is not uncommon for a 

creditor to modify the terms of an ARM to reduce the forthcoming rate increase. Although in this example 

it appeared that the borrower was not in financial difficulty because it made timely payments, the lender 

may decide that default is probable in the foreseeable future (i.e., financial difficulty exists) on the basis of 

each debtor’s individual circumstances. 


The Concept of Insignificant Delay in Payment or Shortfall of Amount 

When lenders determine whether a concession has been made, they consider whether the modification 

results in an insignificant delay in payments or a shortfall of amount. In accordance with ASC 310-10-35- 

17, forms of loan workouts that result in an insignificant delay in the amount of payments contractually 

due to the organization are not typically considered TDRs and thus are not subject to an individual 

impairment evaluation. 

For instance, certain loans may be in short-term forbearance arrangements 14 in which the duration of the 

forbearance period and the shortfall in amount of payments would not significantly affect the effective 

yield expected to be collected on the original loan. Although the effective yield may decrease by a small 

amount, the entity may conclude that this change is insignificant. Conversely, any form of loan workout 

that results in a more-than-insignificant delay or shortfall in amount with regard to the contractually due 

payments by the borrower is subject to impairment recognition, measurement, and disclosure criteria. 

The FASB’s proposed ASU indicates that a creditor should not conclude that a modification is not a TDR 

simply because it results in a delay in payment or shortfall of payment amount. Under the proposed ASU, 

entities must exercise judgment in determining whether a delay in payment or shortfall in the amount of 

payments is more than insignificant. Institutions should consider the facts and circumstances of the form 

of workout arrangement in reaching this conclusion. 

Updated Disclosure Requirements 

Because significant judgment is so pervasive in the accounting for troubled assets, institutions should 

consider whether their MD&A and other disclosures related to troubled assets are sufficiently clear in 

explaining how the institution accounts for those assets. Some questions that should be asked in this 

process include the following: 

• Have I disclosed my policy for identifying loans to be restructured? 

• Do my disclosures make clear to readers the process I use to determine whether a loan 

modification represents a TDR or some other form of modification? 

• Have I discussed and quantified the types of concessions granted on TDRs and the related 

redefault rate by type of concession? 

• Have I disclosed information such as the redefault rate on renegotiated loans, the percentage of 

accrual and nonaccrual TDRs, and other information that provides investors and regulators with 

the success level of my renegotiation efforts? 

• Do my disclosures explain how specific trends (e.g., an increase in the number of delinquent 

loans) have affected my allowance for loan losses? 

• Do my disclosures explain how I consider property appraisals, including any adjustments to dated 

appraisals, in the determination of my allowance for loan losses? 

• Do my disclosures make clear the composition and asset quality of my loan portfolios (e.g., 

geographic concentrations, fixed vs. floating, jumbo vs. conforming)? 

14 An arrangement providing a temporary reduction or suspension of payment on a borrower’s mortgage loan, followed by an arrangement to cure 

the delinquency. The borrower may or may not be making payments during the forbearance plan. Servicers typically enter into a verbal forbearance 

agreement with the borrower with the expectation that the borrower is incurring temporary difficulty in making payments but will be able to catch 

up over a shorter period. 


• Do I sufficiently understand how I determine when a loan is placed on nonaccrual status or 

what my company’s policy is for returning a loan to accrual status (e.g., how many payments a 

borrower must make before returning to accrual status)? 

• Have I clearly disclosed any changes to my business policies and procedures that were made to 

minimize defaults (e.g., number or size of loans originated)? 

• Have I made the appropriate disclosures for loan commitments that are accounted for off 

balance sheet? 

Recently, a number of companies received SEC comment letters regarding TDRs, nonperforming loans, 

and nonaccrual status. These comments are consistent with the FASB’s recently issued ASU 2010-20 

in that the comments call for enhanced disclosures that facilitate financial statement users’ evaluation 

of credit risks and allowance for credit losses for an entity’s portfolio of financing receivables. Areas 

affected by the ASU include (1) the credit quality of receivables, (2) the allowance for loan losses, (3) 

impairment and accrual or nonaccrual status of loans, and (4) loan modifications. The ASU also requires 

some new disclosures, including (1) qualitative information about the type of modifications undertaken 

and the financial impacts thereof, (2) Information on how an organization determines to place a loan on 

nonaccrual status, and (3) information on how an organization recognizes interest income on impaired 

loans. 

For public entities, the new and amended disclosures required by ASU 2010-20 that relate to information 

as of the end of a reporting period will be effective for the first interim or annual reporting periods 

ending on or after December 15, 2010. That is, for calendar-year-end public entities, most of the new 

and amended disclosures in the ASU would be effective for this year-end reporting season. However, 

the disclosures that include information for activity that occurs during a reporting period will be effective 

for the first interim or annual periods beginning after December 15, 2010. Those disclosures include (1) 

the activity in the allowance for credit losses for each period and (2) disclosures about modifications of 

financing receivables. For calendar-year-end public entities, those disclosures would be effective for the 


Impairment Methods 

In accordance with ASC 310-10-35-22, when a restructured loan qualifies as a TDR, or a loan is considered 

individually impaired, impairment should be measured on the basis of one of the following three methods: 

• The present value of expected cash flows discounted at the loan’s original EIR. 

• The loan’s observable market price. 15 

• The fair value of the underlying collateral, as a practical expedient, if the loan is considered 

collateral dependent. 16 

For most TDRs, the present value of expected future cash flows is the method to use because the loans 

are not collateral dependent upon modification, and obtaining a market price for the loan is usually not 

practicable. If entities measure impairment by using an estimate of the expected future cash flows, the 

interest rate used to discount the cash flows is the EIR based on the original contractual rate and not the 

rate specified in the restructuring agreement. Because U.S. GAAP does not specify an order of impairment 

15 Note that the use of a fair value measure in determining loan impairment may cause significantly different impairment results than does a present 

value approach that uses expected cash flows. 

16 If either the observable market price or collateral dependent methods are used in measuring impairment, fair value disclosures under ASC 820-10 

may be required and thus an entity will review for these potential disclosures. 


methods for entities to use, they follow the method that is most consistent with reasonable expectations 

for the recovery of their recorded investment in the loan. 

ASC 310-10-35-26 states, in part: 

If a creditor bases its measure of loan impairment on a present value calculation, the estimates of 

expected future cash flows shall be the creditor’s best estimate based on reasonable and supportable 

assumptions and projections. All available evidence, including estimated costs to sell if those costs are 

expected to reduce the cash flows available to repay or otherwise satisfy the loan, shall be considered 

in developing the estimate of expected future cash flows. 

Note that the estimate of expected cash flows is based on the creditor’s judgment and may differ from 

what is received in the future. In addition, estimates could change dramatically with changes in the 

market or credit worthiness of a borrower. Therefore, present value estimates should be revisited regularly. 

However, ASC 310-10-35-32 notes that regardless of the original measurement method, when it becomes 

probable that the organization will foreclose on a loan, impairment should be measured by comparing 

the entity’s recorded investment in the loan to the fair value less cost to sell of the underlying collateral. 

Once a company looks to the collateral value to determine impairment on a restructured loan, it should 

continue to look to the collateral value to quantify impairment when foreclosure is considered probable. 

Determining that foreclosure will most likely occur is difficult for many creditors. Therefore, it is important 

for organizations to continuously assess loans that are, or may become, probable of foreclosure. 

In the current economic environment, many loans are susceptible to foreclosure, and changes in the 

expected cash flows are very common. In accordance with ASC 310-10-35-37, after the initial impairment 

measurement, management should reassess the impairment on the loan by applying a net present value 

method based on the expected cash flows. Further, the entity may decide to change the impairment 

method, such as when a loan becomes probable of foreclosure. Thus, changes in the valuation allowance 

can result from changes (i.e., in timing or amount) of expected future cash flows of the impaired loan, 

actual cash flows that differ from previous projections, or changes in circumstances that would suggest an 

institution will not recover all expected future cash flows associated with the impaired loan on the basis of 

the restructured terms (i.e., foreclosure is probable or if the underlying collateral is significantly damaged). 

Income Recognition on Impaired Loans 

Even after a financial institution determines a loan is a TDR and records the associated impairment, it is 

faced with the challenge of determining when to change a loan’s status from nonaccrual to accrual. 

Typically, once a loan’s principal or interest is no longer reasonably assured of collection, the loan is placed 

on nonaccrual status, and any subsequent interest accruals are not recognized. Therefore, loans subject to 

a modification or restructuring of terms in a TDR represent troubled loans that most likely were placed on 

nonaccrual status before the modification. 

Under U.S. GAAP, there is no specific guidance on whether a loan that has been modified in a TDR should 

be classified as nonaccrual or returned to accrual status. General revenue recognition guidance under U.S. 

GAAP, however, states that an entity should not recognize income unless it is both earned and realizable. 

The Office of Thrift Supervision 17 recommends that loans should remain on nonaccrual status until the 

borrower has demonstrated a willingness and ability to make the restructured loan payments. 18 Examples 

of loans that may demonstrate willingness and ability to make restructured payments include those with 

17 The Office of Thrift Supervision is the primary regulator of all federal and many state-chartered thrift institutions, which include savings banks and 

savings and loan associations. 

18 Office of Thrift Supervision, Thrift Bulletin 85, “Regulatory and Accounting Issues Related to Modifications and Troubled Debt Restructurings of 1-4 

Residential Mortgage Loans.” 


evidence of sustained performance such as a borrower’s timely payments of principal and interest for a set 

number of months. 

Note that it is not always appropriate to assume that a loan can return to accrual status immediately 

after its restructuring. For example, recent evidence has been seen from results of the Home Affordable 

Modification Program (HAMP), whereby a significant number of loans restructured under the program 

have defaulted again after modification, thus indicating that modification alone does not always suggest 

that principal and interest will be reasonably assured of collection. Although the HAMP program provides 

a trial period to evaluate the borrower’s willingness and ability to make payments, all future payments 

may not be reasonably assured. Therefore, companies must be cautious when creating a policy for the 

return of modified loans to accrual status. 

TDRs were also a hot topic on the agenda at the AICPA’s 2010 Banking Conference. One of the takeaways 

from the conference was that a majority of loan modifications are TDRs in nature and that financial 

institutions need to be careful in determining whether a modification is in fact a TDR because a TDR 

designation cannot subsequently change, as emphasized by the adage “once a TDR, always a TDR.” 

Fair Value Measurements 

The issuance of Statement 157 (codified in ASC 820) four years ago led to a significant amount of 

discussion about its implementation in a turbulent market (and to the issuance of additional guidance), 

which has begun to settle during the past year. In addition, efforts to converge the fair value standards 

of the FASB with those of the IASB continue. For more details on the FASB and IASB joint project on 

fair value measurements, see Section 3. This section discusses both the FASB’s guidance on fair value 

disclosure requirements and other fair value measurement guidance. 

Fair Value Disclosure Update 

ASU Improves Disclosures About Fair Value Measurements 

Last year’s Financial Services Industry update discussed the FASB’s proposed ASU to enhance the 

disclosures related to fair value measurements. After considering comment letters and engaging in further 

deliberation, in January 2010 the FASB issued ASU 2010-06, which added to ASC 820 requirements for 

disclosures about transfers into and out of Levels 1 and 2 and for separate disclosures about purchases, 

sales, issuances, and settlements related to Level 3 measurements. ASU 2010-06 also clarifies existing 

fair value disclosure requirements related to the level of disaggregation and to the inputs and valuation 

techniques used to measure fair value. The key changes this ASU makes to fair value disclosure guidance 

are summarized below. 

Unlike the proposed ASU, the final ASU does not require entities to provide sensitivity disclosures. 19 The 

FASB decided to exclude this requirement from the final ASU in view of comments it received during the 

exposure period about the operationality and cost of such disclosures and its October 2009 decision to 

converge its guidance with the IASB’s on fair value measurement and disclosure. The FASB is considering 

whether to require sensitivity disclosures jointly with the IASB as part of their convergence project. In 

June 2010, the FASB issued a proposed ASU, Amendments for Common Fair Value Measurement and 

Disclosure Requirements in U.S. GAAP and IFRSs, which reintroduced the sensitivity analysis requirement. 

See Section 3 for further discussion of this ASU. 

19 Under the proposed ASU, for Level 3 fair value measurements, if changing one or more of the significant unobservable inputs to reasonably possible 

alternative inputs would have changed the fair value significantly, entities would have been required to state that fact and disclose the total effect 

of those changes. In addition, entities would have been required to describe how the effect of a change to a reasonably possible alternative input 

was calculated. The proposed ASU also suggested that an entity disclose, for each class of Level 3 measurements, quantitative information about the 

significant inputs used and reasonably possible alternative inputs. 


Level of Disaggregation 

Before the amendments made by ASU 2010-06, the guidance in ASC 820 required entities to provide fair 

value measurement disclosures by “major category of assets and liabilities.” The term “major category” 

has often been interpreted to refer to a line item in the statement of financial position. The ASU amends 

ASC 820 to require entities to provide fair value measurement disclosures for each class of assets and 

liabilities. Disclosure “by class” may be more useful since a class is often a subset of assets or liabilities 

within a line item in the statement of financial position. When providing disclosures for equity and 

debt securities, entities should determine class on the basis of the nature and risks of the securities, in 

a manner consistent with ASC 320-10-50-1B and, if applicable, ASC 942-320-50-2. Under ASC 320-10- 

50-1B, in determining the nature and risks of the securities, entities should consider activity or business 

sector, vintage, geographic concentration, credit quality, and economic characteristics. ASC 942-320-50-2 

requires financial institutions to disclose all of the following major security types (additional types may be 

necessary): 

• Equity securities, segregated by any one of the following: 

o Industry type. 

o Entity size. 

o Investment objective. 

• Debt securities issued by: 

o U.S. Treasury and other U.S. government corporations and agencies. 

o States of the United States and political subdivisions of the states. 

o Foreign governments. 

o Corporations. 

• Mortgage-backed securities, including: 

o Residential. 

o Commercial. 

• Debt obligations, including: 

o Collateralized. 

o Noncollateralized. 

For all other assets and liabilities, entities should use judgment to determine the appropriate classes of 

assets and liabilities for which they should provide disclosures about fair value measurements. 

Under ASU 2010-06, when determining the appropriate classes of its assets and liabilities, an entity 

must consider the nature and risks of the assets and liabilities as well as their placement in the fair value 

hierarchy (i.e., Level 1, 2, or 3). For example, a greater number of classes may be necessary for fair value 

measurements with significant unobservable inputs (i.e., Level 3 measurements) because of the increased 

uncertainty and subjectivity involved in these measurements. 


In determining the appropriate level of disaggregation, an entity should also consider what is required for 

specific assets and liabilities under other GAAP (e.g., the disclosure level required for derivative instruments 

under ASC 815). 

Questions have arisen about whether, when this guidance is applied to derivative contracts, the level 

of disaggregation for disclosures under ASC 820 (as amended by ASU 2010-06) is the same as that for 

disclosures under ASC 815. Consequently, questions have arisen about how the term “class,” as discussed 

in ASC 820, compares with the term “type of contract” used for the ASC 815 tabular disclosures. In 

supporting its judgments about the determination of class for its derivative contracts, a reporting entity 

should consider the type of derivative contracts it holds (i.e., the level of disaggregation required for 

the ASC 815 tabular disclosures). However, as described in ASC 820-10-50-2A, class is based on the 

nature and risks of the derivatives and their classification in the hierarchy and is often determined at a 

greater level of disaggregation than the reporting entity’s line items in the statement of financial position. 

Therefore, in determining the nature and risks of its derivative contracts, a reporting entity should consider 

the following factors (in addition to type of contracts): the valuation techniques and inputs used to 

determine fair value, the classification in the fair value hierarchy, and the level of disaggregation in the 

statement of financial position. A reporting entity may also consider the level of disaggregation it uses for 

other ASC 815 disclosures (e.g., qualitative and volume), which may vary from the level of disaggregation 

it uses for the ASC 815 tabular disclosures. 

For equity and debt securities, ASC 320-10-50-1B provides guidance on class determination and 

provides useful general considerations for assessing nature and risks. On the basis of these requirements, 

concentrations are likely to be key considerations in the class determination for all assets and liabilities 

within the scope of the ASU. For example, a reporting entity that engages in material commodity 

transacting may consider concentrations in areas such as commodity type, or a reporting entity with a 

material foreign exchange portfolio may consider concentrations by discrete currencies. 

In summary, the classes of derivative contracts under the ASC 820 disclosures may differ from the “type of 

contracts” used for the ASC 815 tabular disclosures. Depending on the facts and circumstances, class may 

be more disaggregated than type of contract, but it generally should not be more aggregated. 

Transfers Into and Out of Levels 1, 2, and 3 

Before the effective date of ASU 2010-06, ASC 820 only required disclosures about transfers into and 

out of Level 3 for recurring fair value measurements as part of the Level 3 reconciliation of beginning and 

ending balances. The ASU 2010-06 amendments expand these disclosure requirements to include all three 

levels of the fair value hierarchy. More specifically, for assets and liabilities that are measured at fair value 

on a recurring basis in periods after initial recognition, the ASU requires an entity to disclose the amounts 

of “significant” 20 transfers between Levels 1 and 2, and transfers into and out of Level 3, of the fair value 

hierarchy and the reasons for those transfers. An entity must disclose and discuss significant transfers into 

each level separately from transfers out of each level. For this purpose, significance is judged with respect 

to earnings and total assets or total liabilities or, when changes in fair value are recognized in other 

comprehensive income, with respect to total equity. In addition, an entity should disclose and consistently 

follow its policy for determining when transfers between levels are recognized (e.g., as of the (1) actual 

date of the event or change in circumstances that caused the transfer, (2) beginning of the reporting 

period, or (3) end of the reporting period). The entity’s policy for transfers into Levels 1, 2, and 3 should 

be the same as that for transfers out of Levels 1, 2, and 3. 

20 The FASB’s proposed ASU Amendments for Common Fair Value Measurements and Disclosures Requirements in U.S. GAAP and IFRSs, issued in June 

2010, amends the disclosure requirement to include any transfers between Level 1 and Level 2 of the fair value hierarchy. See Section 3 for further 

discussion of this ASU. 


Reconciliation on a Gross Basis 

The ASU amends the reconciliation of the beginning and ending balances of Level 3 recurring fair value 

measurements. In periods after initial recognition, an entity presents information about purchases, sales, 

issuances, and settlements for significant unobservable inputs (Level 3) on a gross basis (i.e., each type 

separately) rather than as a net number as previously required. Financial statement users have indicated 

that gross presentation is more useful. 

Disclosures About Inputs and Valuation Techniques 

ASU 2010-06 clarifies that a description of the valuation techniques (e.g., market approach, income 

approach, cost approach) and inputs used to measure fair value is required for both recurring and 

nonrecurring fair value measurements. In addition, such disclosures are required for fair value 

measurements classified as either Level 2 or Level 3. If the valuation technique has changed, entities 

should disclose that change and the reason for the change. 

Upon implementation, various constituents have asked whether ASC 820 now requires entities to disclose 

quantitative information about inputs. On the basis of the guidance in ASC 820-10-50-2(e), a reporting 

entity is not required to disclose quantitative information about inputs. However, in many instances, a 

reporting entity may conclude that such information is appropriate. This determination is based on the 

reporting entity’s evaluation of what types of input disclosures enable financial statement users to assess 

the entity’s valuation techniques and inputs. A reporting entity should prepare its disclosures about inputs 

in accordance with ASC 820-10-50-2(e). In other words, the discussion of inputs is expected to vary by 

class of assets or liabilities, level in the fair value hierarchy, and valuation technique(s) used. Likewise, we 

believe that there should be some degree of consistency between the items discussed in the narrative 

about inputs and valuation techniques and the class determination. For example, disclosure about inputs 

specific to a certain commodity type (e.g., average tenor and geographic concentration for natural gas 

positions) may suggest that the commodity type should represent a class of its own. 

Effective Date and Transition 

The guidance in the ASU is effective for the first reporting period (including interim periods) beginning 

after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, 

sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after 

December 15, 2010, and for interim periods within those fiscal years. In the period of initial adoption, 

entities will not be required to provide amended disclosures for any previous periods presented for 

comparative purposes. However, those disclosures are required for periods ending after initial adoption. 

Early adoption is permitted. 

VRG Update 

The Valuation Resource Group (VRG), the FASB’s advisory body on valuation-related issues, met in April 

of this year to discuss practice issues associated with fair value measurement. 21 At the April meeting, the 

VRG discussed Issue 2010-01: the FASB/IASB joint project on fair value measurement and disclosure and 

whether the tentative decisions reached as part of this project would represent a significant change in 

practice or would result in unintended consequences. The VRG voiced concerns regarding some of the 

tentative decisions — in particular, those on blockage factors. The following table summarizes (1) the 

boards’ tentative decisions to date that the FASB staff believes will change the existing guidance in ASC 

820 (though these decisions may not necessarily result in a change in practice) and (2) the VRG members’ 

discussion. For further discussion of related proposed guidance, see Section 3. 

21 This document focuses only on topics discussed by the VRG that are significant to the financial services industry. For summaries of all issues discussed 

at the April 12, 2010, VRG meeting, see Deloitte’s Heads Up on the meeting. 


Subject 

The principal 

(or most 

advantageous) 

market 

Market 

participants 

Highest and 

best use 

Tentative Board Decisions That Would 

Change Existing Guidance in ASC 820 VRG Members’ Discussion 

• The reference market for a fair value 

measurement is the principal (or most 

advantageous) market, provided that an entity 

has access to that market. 

• The principal market is the market with the 

greatest volume and level of activity for the 

asset or liability. 

• The principal market is presumed to be the 

market in which the entity normally transacts. 

An entity does not need to perform an 

exhaustive search for markets that might have 

more activity than the market in which the 

entity normally transacts. 

• The determination of the most advantageous 

market takes into account both transaction 

costs and transportation costs. 

• In the description of market participants, 

“independence” means that market 

participants are independent of each other 

(i.e., they are not related parties). 

• A price in a related-party transaction may be 

used as an input to a fair value measurement 

if the transaction was entered into at market 

terms. 

• The unobservable inputs derived from an 

entity’s own data, adjusted for any reasonably 

available information that market participants 

would take into account, are considered 

market-participant assumptions and meet the 

objective of a fair value measurement. 

• The highest-and-best-use concept relates 

only to nonfinancial assets, not to liabilities or 

financial assets. 

• The terms “physically possible,” “legally 

permissible,” and “financially feasible” will be 

defined. 

Some VRG members expressed concern about 

adding the access notion to the “principal or most 

advantageous market” principle. They pointed out 

that this could result in unintended consequences, 

particularly when there is no or a limited market. 

They also highlighted that a price in a market that 

an entity does not have access to may nevertheless 

be a relevant observable input that the entity could 

consider in estimating fair value. 

VRG members expressed concern that the guidance 

on related parties was circular. They pointed 

out that to use the price from the related-party 

transaction, an entity would have to prove it was at 

market terms (in which case the entity would not 

need the price from the related-party transaction). 

Some VRG members indicated their belief that 

the guidance on related parties should take into 

account existing related-party literature, such as 

ASC 850-10-50-5, which states, “Transactions 

involving related parties cannot be presumed to be 

carried out on an arm’s-length basis, as the requisite 

conditions of competitive, free-market dealings 

may not exist. Representations about transactions 

with related parties, if made, shall not imply that 

the related party transactions were consummated 

on terms equivalent to those that prevail in arm’slength 

transactions unless such representations can 

be substantiated.” 

Some VRG members noted that, in certain 

circumstances, nonfinancial assets can be bundled 

as a group with financial instruments to offset the 

risk of another asset or liability that is not measured 

at fair value (e.g., an inventory purchase contract). 

Some VRG members were concerned about 

eliminating the in-use concept for financial 

assets because it might lead to a conclusion that 

investment companies cannot include control 

premiums when valuing controlling interests in 

portfolio companies. 

The VRG also noted that more guidance on what is 

considered a nonfinancial asset and liability would 

be helpful. 


Subject 

Valuation 

premise 

Premiums and 

discounts in 

a fair value 

measurement 

Tentative Board Decisions That Would 

Change Existing Guidance in ASC 820 VRG Members’ Discussion 

• The concept of a valuation premise relates 

only to nonfinancial assets, not to liabilities or 

financial assets. 

• The objective of measuring an individual asset 

at fair value is to determine the price for a 

sale of that asset alone, not for a sale of that 

asset as part of (1) a group of assets or (2) 

a business. However, when the highest and 

best use of an asset is as part of a group of 

assets, the fair value measurement of that 

asset presumes that the sale is to a market 

participant that has, or can obtain, the 

“complementary assets” and “complementary 

liabilities.” Complementary liabilities include 

working capital but do not include financing 

liabilities. 

• The objective of the valuation premise will be 

described without using the terms “in-use” 

and “in-exchange” because those terms are 

often misunderstood. 

• Blockage factors will be clarified and a 

description of how they differ from other 

types of adjustments, such as a lack of 

marketability discount, for an individual 

instrument will be included. 

• The application of a blockage factor will 

be prohibited at any level of the fair value 

hierarchy. 

• There would be guidance specifying that a 

fair value measurement in Levels 2 and 3 of 

the fair value hierarchy takes into account 

other premiums and discounts that market 

participants would consider in pricing an asset 

or liability at the unit of account specified in 

the relevant standard (except for a blockage 

factor). 

Many VRG members expressed concern that the 

revisions to the guidance on groups of assets could 

have significant implications for current practice, 

cause unnecessary confusion, or both. 

VRG members thought that this was a significant 

change in practice. Concerns were raised regarding 

the use of the term “lack of marketability discount,” 

since they did not believe this term was understood 

in practice. This term has historically applied to 

minority interests in privately held stocks. Some 

VRG members voiced concern about the proposal 

to preclude the consideration of blockage in Levels 

2 and 3 of the fair value hierarchy. Some VRG 

members noted that blockage discounts typically 

apply to market transactions for assets that do not 

relate to Level 1 fair value measurements (e.g., 

a fleet of cars). They believed that it would be 

challenging to distinguish a blockage discount from 

a liquidity and marketability discount. 

Accounting for Financial Instruments — Effects of the FASB’s 

Proposed ASU 

Summary of the ED 

For years, the FASB and IASB (the “boards”) have attempted to solve the mystery of accounting for 

financial instruments. Their attempts have typically been made in response to pressure on their accounting 

models exerted by new financial instrument products and more creative accounting schemes. Driven by 

limitations in their models and the stress on financial markets due to the global financial crisis, the boards 

joined efforts to develop a comprehensive reform of their models for financial instrument accounting. 

On May 26, 2010, the FASB issued a proposed ASU on accounting for financial instruments, derivative 

instruments, and hedging activities. Although creation of this ASU was one of the boards’ major 


convergence projects, the models proposed by the FASB and IASB failed to converge. Nevertheless, the 

boards intend to continue to work toward international convergence. This section focuses on the FASB’s 

proposal and, in some instances, compares it with elements of the IASB’s proposal. 

The proposed ASU contains a comprehensive new model of accounting for financial assets and financial 

liabilities. If adopted as final, the FASB’s proposal would significantly affect the accounting for a broad 

range of financial instruments, as outlined below. The proposal would affect all entities holding or issuing 

financial instruments; however, the financial services industry would probably be the one must significantly 

affected. Comments on the proposed ASU were due by September 30, 2010; for a summary of the nature 

and content of the more than 2,600 comment letters received by the FASB, see the Comment Letters 

section below. 

Scope of the Proposed ASU 

The proposed ASU applies to all entities and to all financial assets and financial liabilities that are not 

specifically indicated as outside its scope. Types of financial assets and financial liabilities included within 

the scope of the ASU include, but are not limited to: 

• Investments in debt securities (e.g., government and corporate bonds). 

• Investments in equity instruments (e.g., publicly traded equity securities and nonmarketable 

equity investments, when the investor does not have significant influence over the investee). 

• Investments in equity securities, when the investor has significant influence over the investee but 

the operations of the investee are unrelated to the investor’s consolidated operations. 

• Mutual fund investments. 

• Beneficial interests in securitized financial assets. 

• Loans (e.g., consumer loans, commercial loans, and mortgage loans). 

• Trade receivables and trade payables. 

• Deposit liabilities. 

• An entity’s own debt. 

• Derivative financial instruments (e.g., options, forwards, futures, and swap contracts). 

The proposed ASU also identifies certain exceptions, such as employee stock options, interests in 

consolidated subsidiaries (including equity investments and noncontrolling interests), instruments classified 

in stockholders’ equity, pension obligations, most insurance contracts, lease assets, and lease liabilities. 

For a more complete list of financial instruments that are outside its scope, see the proposed ASU on the 

FASB’s Web site or Deloitte’s May 28, 2010, Heads Up. 

Classification of Financial Instruments 

Upon initial recognition, an entity would classify a financial instrument into one of the categories of 

financial assets and financial liabilities identified in the proposed ASU and would not have the ability to 

subsequently reclassify between categories. Financial instruments would largely be measured at (1) fair 

value, with changes in fair value recognized in net income (FV-NI); (2) fair value, with certain changes in 

fair value recognized in other comprehensive income (FV-OCI); or (3) amortized cost. These classification 


categories would replace the classification categories for financial instruments under current U.S. GAAP 

(e.g., held for trading, available for sale, held to maturity, and loans held for sale or held for investment). 

For further details on classification specifications resulting from the ASU, refer to Table 1 below. 

As mentioned above, the FASB’s proposal prohibits subsequent reclassification between categories. 

This differs from the IASB’s proposal, which states that an entity that changes its business model must 

reclassify its financial instruments and provide certain disclosures. For a summary of the differences 

between the proposed ASU and the IASB’s proposal, see Table 2 below. 

The default category for financial assets and financial liabilities within the scope of the proposed ASU 

(other than core demand deposit liabilities and certain redeemable investments, as further discussed 

below) is FV-NI. However, an entity is permitted instead to classify an asset or liability as FV-OCI or 

amortized cost if it meets certain qualifying criteria, as discussed below. If classified as FV-OCI, the 

instrument is measured at fair value, but certain specified changes in fair value are recognized in OCI 

rather than in net income. 

Classification as FV-OCI 

As a result of the proposed changes, financial assets or financial liabilities that are debt instruments can be 

classified as FV-OCI if (1) the asset or liability maintains certain cash flow characteristics, 22 (2) the entity’s 

business strategy for the instrument is to collect or pay the related contractual cash flows rather than to 

sell the financial asset or to settle the financial liability with a third party, and (3) no embedded derivatives 

exist that would otherwise require bifurcation under ASC 815-15. 

This third requirement stems from the elimination of certain bifurcation requirements for contracts that are 

within the scope of the proposed ASU (see further discussion in the Embedded Derivatives section below). 

A hybrid financial instrument containing an embedded derivative that otherwise must be accounted for 

separately from the host contract (in accordance with ASC 815-15) would not be allowed classification 

under FV-OCI and would instead be measured in its entirety at fair value, with changes in fair value 

immediately recognized in earnings. 

Classification as Amortized Cost 

An entity is permitted to classify short-term receivables and payables as amortized cost if they (1) arise 

in the normal course of business, (2) are due in customary terms not exceeding one year, (3) meet the 

FV-OCI classification criteria (see the Classification of FV-OCI section above), and (4) are not short-term 

lending arrangements (e.g., credit card receivables or short-term debt securities). Financial assets other 

than short-term receivables cannot be classified as amortized cost. 

An entity may also elect to classify financial liabilities other than deposit liabilities as amortized cost if the 

financial liability meets the criteria for FV-OCI classification and the measurement of the financial liability at 

fair value would create or exacerbate an accounting mismatch. 23 

22 Fair value is considered to create or exacerbate an accounting mismatch only if (1) the financial liability is contractually linked to an asset measured 

at amortized cost (e.g., a liability is collateralized by an asset measured at amortized cost or is contractually required to be settled upon the 

derecognition of such an asset), (2) the financial liability is issued by and recorded in or evaluated by the chief operating decision maker as part of an 

operating segment that subsequently measures less than 50 percent of the segment’s recognized assets at fair value, or (3) the financial liability does 

not meet the above criteria but is a liability of a consolidated entity for which less than 50 percent of consolidated recognized assets are subsequently 

measured at fair value. 

23 Cash flow characteristics include (1) an amount (principal amount of the contract, adjusted by any original issue discount or premium) is transferred 

to the debtor (issuer) at inception that will be returned to the creditor (investor) at maturity or other settlement; (2) the contractual terms of the debt 

instrument identify any additional contractual cash flows to be paid to the investor, either periodically or at the end of the instrument’s term; and 

(c) the debt instrument cannot contractually be prepaid or otherwise settled in such a way that the investor would not recover substantially all of its 

initially recorded investment other than through its own choice. 


Loan Commitments and Standby Letters of Credit 

An entity that provides a loan commitment or financial standby letter of credit (“commitment”) must 

classify such a commitment in the same way it classifies the loan that would be extended under the 

outstanding offer. Thus, the commitment would be classified as FV-OCI if the resulting loan would be 

classified as FV-OCI and as FV-NI if the loan would be classified as FV-NI. Loan commitments and financial 

standby letters of credit held by a potential borrower are outside the scope of the proposed ASU. 

Special Guidance for Broker-Dealers and Investment Companies 

Under the proposed ASU, broker-dealers and investment companies must classify all of their financial 

assets as FV-NI. Broker-dealers are permitted to use the FV-OCI or amortized cost categories for their 

financial liabilities if those liabilities meet the qualifying criteria. However, investment companies must 

classify all of their financial liabilities at fair value and recognize all changes in fair value as increases (or 

decreases) in net assets for the period. 

Measurement of Financial Instruments 

The reporting basis of financial instruments that do not meet the amortized cost requirements will be 

classified as fair value. 

Initial Measurement 

A financial instrument classified as FV-NI would be initially measured at fair value with any difference 

between the actual transaction price and the estimated fair value immediately recognized as a gain or loss 

in net income. Other financial instruments within the scope of the proposed ASU are initially measured at 

their transaction price. 

In addition, for financial instruments classified as FV-OCI, any difference between the transaction price 

and fair value upon the first remeasurement is recognized in OCI. However, if on the basis of “reliable 

evidence” an entity determines that there is a “significant” difference between the transaction price and 

fair value at initial recognition for such an instrument, the entity would initially measure the financial 

instrument at fair value. 24 

Transaction Costs and Fees 

For a financial instrument classified as FV-NI, any initial transaction costs and fees (e.g., loan origination 

fees and costs) are recognized in net income immediately as incurred. However, for those financial 

instruments classified as FV-OCI, such charges are deferred and recognized in earnings as a yield 

adjustment via the interest method over the life of the instrument (in a manner generally consistent with 

current U.S. GAAP). 

Further, preparers must consider additional income statement presentation issues that may arise. Notably, 

investment companies that currently report transaction costs in net income as “realized and unrealized 

gains or losses on financial instruments” will have geographical shifts in these costs because they would 

become more akin to “investment income and expenses.” 

24 The proposed ASU requires that if “reliable evidence” suggests a “significant difference” between the transaction price and fair value at initial 

recognition, the entity must consider whether the transaction includes “other elements” (e.g., unstated rights and privileges) that would require 

accounting under other U.S. GAAP. 


Ongoing Fair Value Measurement 

The changes proposed would significantly expand the use of fair value measurements in the financial 

statements. Financial instruments that may currently be reported at amortized cost (e.g., held-to-maturity 

securities, loans held for investment, and certain financial liabilities) would instead be measured at fair 

value in the statement of financial position. Fair value accounting would also apply to nonmarketable 

equity securities that are currently subject to the cost method of accounting and some that are currently 

subject to the equity method of accounting (see additional discussion in the Equity Method of Accounting 

section below). 

A significant number of financial liabilities would also be measured at fair value instead of at amortized 

cost. This has caused many to question whether these changes would indeed provide new meaningful 

information to users of the financial statements because of the effect of the issuer’s own credit on these 

measurements. 

Other Measurement Attributes 

Core Deposits 

The proposal also potentially adds financial reporting complexity by introducing a new remeasurement 

approach for core deposit liabilities. This new measurement basis would be considered neither fair value 

nor amortized cost and, as a result, some contend that it is unclear what that new measurement attribute 

is intended to represent. The proposed ASU indicates that entities would measure core deposit liabilities, 25 

if due on demand, at the present value of the average core deposit amount by using an implied maturity 

of the deposits as the valuation time horizon. Entities would apply the measurement approach separately 

for each major type of deposit by using a discount rate equal to the difference between the alternative 

funds rate and the all-in-cost-to-service (the customer deposits) rate. 

As a result, the core deposit liability on an entity’s balance sheet would be expected to be less than 

the face amount of those same deposits, given that they are an inexpensive source of bank capital. In 

addition, under the proposed ASU’s presentation changes, an entity would be required to display both the 

amortized cost and the “fair value” of the core deposit liability in its balance sheet. 

In proposing a remeasurement attribute for core demand deposit liabilities, the FASB appears to have 

placed particular importance on (1) the fact that core deposits are a key source of value for a financial 

institution and (2) its belief that a remeasurement attribute would give investors useful information about 

assessing asset-liability mismatches. 

Investments Redeemable at a Specified Amount 

A financial instrument with all of the following characteristics would be exempt from the proposed fair 

value measurement guidance: 

a. [The financial instrument] has no readily determinable fair value because ownership is 

restricted and it lacks a market. 

b. It cannot be redeemed for an amount greater than the entity’s initial investment. 

c. It is not held for capital appreciation but rather to obtain other benefits, such as access to 

liquidity or assistance with operations. 

25 Core deposits are defined in the ASU as “[d]eposits without a contractual maturity that management considers to be a stable source of funds, which 

excludes transient and surge balances.” 


d. It must be held for the holder to engage in transactions or participate in activities with the 

issuing entity. 

An entity must measure such an investment at its redemption value rather than at fair value. Although 

the proposed guidance provides details necessary for an instrument to qualify for measurement at the 

redemption value, this option conflicts with the primary objective of the proposed ASU, which is to 

reduce complexity in the accounting for financial instruments (e.g., by limiting the number of different 

measurement attributes). Specifically, measurement of the value of Federal Home Loan Bank stock or an 

investment in the Federal Reserve Bank, which can be redeemed only for a specified amount, would not 

be consistent with the measurement of other investments with similar risk profiles. 

Interest Income Recognition 

The proposed ASU includes guidance on how entities should recognize interest income for financial assets 

that are classified as FV-OCI. Financial statement preparers calculate interest income by applying the 

financial asset’s EIR to its amortized cost (net of any related allowance for credit impairments). 

Determining the EIR is not always straightforward and largely depends on whether an asset was 

purchased at a discount related, at least in part, to its credit quality. Specifically, financial assets purchased 

at a discount that is not related to credit quality would have an EIR that equates the contractual cash 

flows with the initial cash outflow (exclusive of any net deferred loan fees or costs, premium, or discount). 

Alternatively, if an asset’s discount relates partially or wholly to credit quality, the EIR is set to a rate 

that equates the entity’s estimate of cash flows expected to be collected with the purchase price of the 

financial asset. 

The approach for recognizing interest income on the basis of an asset’s amortized cost balance, net of 

any allowance for credit losses, will often result in a difference between the amount of interest income 

accrued and the amount of interest income contractually due, since the amount contractually due does 

not take the allowance into account. 

Financial Statement Presentation 

Statement of Financial Position 

Financial instruments classified as FV-NI and FV-OCI are presented separately on the face of the balance 

sheet. Those classified as FV-OCI must include the following amounts in separate line items on the face of 

the statement of financial position: 

1. Amortized cost 

2. Allowance for credit losses [on financial assets] 

3. [Accumulated a]mount needed to adjust amortized cost less allowance for credit losses to fair 

value 

4. Fair value. 

An entity is also required to present separately, on the face of the statement of financial position, either 

(1) the amounts included in accumulated OCI that relate to changes in fair value or (2) the remeasurement 

amount that has been recognized in OCI. 


Income Recognition 

For a financial instrument classified as FV-NI, all changes in fair value during the period are recognized 

in net income. However, for those financial instruments classified as FV-OCI, a portion of the change in 

fair value during the period is recognized in OCI. 26 In addition, changes in fair value that were previously 

recognized in OCI are recognized in net income when they are realized through sale or settlement. 

Comprehensive Income 

In conjunction with its proposed changes to the accounting for financial instruments, the FASB has 

proposed a single statement of comprehensive income as part of the basic financial statements in each 

reporting period. 27 This single statement would include a total for comprehensive income and a subtotal 

for net income. For financial instruments classified as FV-NI, an entity must present one aggregate amount 

for realized and unrealized gains and losses on the face of the statement of comprehensive income. 

For financial instruments classified as FV-OCI, an entity must present the following amounts recognized in 

net income separately on the face of the statement of comprehensive income: 

• Current-period interest income and expense, including amortization (or accretion) of any 

premium (or discount) at inception. 

• Credit impairment for the period. 

• Realized gains or losses (by means of an offsetting entry to OCI to the extent that prior-period 

unrealized gains or losses on the instrument were reported in OCI). 

For financial liabilities measured at fair value, an entity must separately present, on the face of the 

statement of comprehensive income, significant changes in fair value that are related to an entity’s own 

credit standing. 

Credit Impairment 

In a move to simplify the various impairment models currently spread throughout U.S. GAAP, the FASB is 

proposing the use of the same credit impairment approach for most financial assets, such as loan assets, 

debt securities, beneficial interests in securitized financial assets, and purchased loan assets with evidence 

of credit deterioration. For instance, the proposed ASU’s impairment guidance would replace the current 

U.S. GAAP approach to assessing OTTIs for debt securities. 

Assessment and Measurement 

Under the proposed ASU, an entity would recognize credit impairment when the entity “does not expect 

to collect all contractual amounts due for originated financial asset(s) and all amounts originally expected 

to be collected upon acquisition for purchased financial asset(s).” Note that the proposal does not allow 

an entity to apply a probability threshold (e.g., similar to a loss contingency model) when assessing 

whether a credit impairment has occurred. Although in assessing credit impairment, the entity would not 

forecast future events or economic conditions that do not exist as of the reporting date, this proposed 

approach requires an entity to consider the impact of past events and existing conditions on the current 

and future collectability of the financial asset cash flows. 

26 The portion of change in fair value recognized in OCI equals the total change in fair value minus (1) current-period interest accruals (including 

amortization or accretion of any premium or discount and certain deferred loan-origination fees and costs), (2) current-period credit losses (or 

reversals), and (3) changes in fair value attributable to the hedged risk in a qualifying fair value hedge that are recognized in net income. 

27 For further details, see Deloitte’s May 28, 2010, Heads Up. 


After determining that credit impairment exists, an entity must: 

[R]ecognize . . . at the end of each financial reporting period the amount of credit impairment related 

to all contractual amounts due for originated financial asset(s) that the entity does not expect to collect 

and all amounts originally expected to be collected for purchased financial asset(s) that the entity does 

not expect to collect. 

Unlike existing U.S. GAAP, the proposed ASU requires entities to use an allowance account to record credit 

losses for investments in debt securities classified as FV-OCI, not just for loan assets. In addition, unlike 

existing U.S. GAAP, the proposed ASU permits entities to evaluate not only loans but also investments in 

debt securities for credit impairment on a collective, pool, or portfolio basis. 

For example, a loan asset is originated with a principal amount of $100. At the end of the first reporting 

period, credit impairment has occurred and the entity no longer expects to collect $12 of future principal 

cash flows, which has a present value of $10. As a result, the entity records the following journal entry: 

Credit loss $ 10 

Debit Credit 

Allowance for credit loss (presented as a contra-asset) $ 10 

Collective Basis 

Unlike existing U.S. GAAP, the proposed ASU permits entities to measure impairment for investments in 

debt securities classified as FV-OCI on a pooled or collective basis. Measuring impairments on a pooled 

basis requires an entity to aggregate financial assets that share common risk characteristics (e.g., collateral 

type, interest rate, and term). Subsequently, the entity applies a “loss rate” by using historical loss rates 

that apply to the relevant pool of similar financial assets, adjusted for information about cash flow 

collectability. The proposed ASU does not prescribe a specific method for determining historical loss rates. 

Rather, it states that this method “may vary depending on the size of the entity, the range of the entity’s 

activities, the nature of the entity’s pools of financial assets, and other factors.” 

In some circumstances, a financial asset may have been individually evaluated for impairment, but 

no past events or existing conditions indicate that an impairment exists. However, an entity must still 

assess whether, for a group of similar financial assets (i.e., assets with similar risk characteristics), a loss 

would have existed if the financial asset were assessed as part of a pool. If that is the case, the entity 

must recognize a credit impairment for the financial asset measured by applying the historical loss rate 

applicable to the group of similar financial assets referenced by the entity in its assessment. 

Direct Write-Off of Financial Assets 

An entity is required to write off a financial asset (or part of a financial asset) if and when the entity has 

“no reasonable expectation of recovery” (i.e., the asset is uncollectible). The write-off is accomplished by a 

reduction of the allowance for credit losses (i.e., Dr. Allowance, Cr. Financial asset). If cash is subsequently 

received on a financial asset that was previously written off, this recovery is recognized in net income (i.e., 

Dr. Cash, Cr. Recovery). 

Hedging Activities 

The FASB also proposed significant changes to the hedge accounting requirements currently in U.S. 

GAAP. Many individuals may have déjà vu when they read through these proposed changes because 

the FASB proposed similar changes to the hedging requirements in 2008. After much debate of the 

original proposal and the ongoing credit crisis, the FASB delayed its hedge accounting project until this 

comprehensive financial instrument proposal was unveiled. The current proposal is similar to the 2008 


proposal; however, the current proposal retains the existing ASC 815 provisions that allow an entity to 

designate hedging relationships by risk (i.e., benchmark interest rate risk, foreign currency exchange rate 

risk, and credit risk) for financial hedged items. The following discussion covers the highlights of the 

current proposal. 

Effectiveness Assessment 

The proposed ASU lowers the minimum threshold to qualify for hedge accounting from “highly effective” 

to “reasonably effective.” The FASB believes the lower threshold would reduce some of the complexities 

preparers face in complying with the current hedge effectiveness requirements. Although the FASB did 

not define the term “reasonably effective,” the proposed ASU states that preparers should use judgment 

in determining whether the hedging relationship is reasonably effective. One of the consequences of the 

FASB’s lowering of the minimum threshold to qualify for hedge accounting and simplification of the hedge 

accounting model is the elimination of both the shortcut and critical terms match methods of hedge 

accounting. 

The FASB’s proposal also eliminates the need for an entity to periodically assess hedge effectiveness 

quantitatively. Instead, for most hedging relationships, a qualitative assessment demonstrating that an 

economic relationship exists between the hedging instrument and the hedged item is sufficient to show 

that the hedging instrument will be reasonably effective at achieving offset. Sometimes, however, when 

a qualitative assessment is inconclusive, an entity must supplement the qualitative assessment with a 

quantitative analysis. After hedge inception, assessment of hedge effectiveness would not be necessary 

unless changes in circumstances indicate that the hedging relationship may no longer be reasonably 

effective. 

Measuring and Reporting Ineffectiveness in Cash Flow Hedges 

The proposal requires an entity to measure cash flow hedge ineffectiveness by comparing the change 

in fair value of the actual hedging instrument with the present value of the cumulative change in 

expected future cash flows of the hedged transaction. Unlike existing U.S. GAAP, the proposed ASU 

would also require entities to record ineffectiveness for under-hedges in earnings. An entity may perform 

its measurement calculations by using a hypothetical derivative to measure the cumulative change in 

expected future cash flows of the hedged transaction. That hypothetical derivative would (1) be priced at 

market, (2) mature on the date of the hedged transaction, and (3) exactly offset the hedged cash flows. 

Dedesignations 

Unlike existing U.S. GAAP, the proposed ASU prohibits an entity from electively removing a hedge 

designation. A hedging relationship can be discontinued only if (1) it no longer meets one of the required 

hedging criteria in ASC 815 or (2) the hedging instrument expires or is sold, terminated, or exercised. 

An alternative to this prohibition would be for an entity to enter into an offsetting hedging position 

and concurrently document that the offsetting hedging position has effectively terminated the original 

hedge designation. The proposal does prohibit the redesignation of a previously dedesignated hedging 

instrument. 

Embedded Derivatives 

The proposed ASU eliminates the current bifurcation requirements for financial host contracts that are 

within its scope. Instead, such instruments must be classified as FV-NI and measured in their entirety at fair 

value, with changes in fair value immediately recognized in earnings. The proposed ASU does not change 

the bifurcation requirements for nonfinancial host contracts or for financial host contracts that are outside 

its scope. 


Equity Method of Accounting 

The proposed ASU narrows the scope of equity method accounting under ASC 323 by requiring its 

application to equity investments in which (1) the entity has significant influence over the investee and (2) 

operations of the investee are considered related to the investor’s consolidated operations. The proposed 

ASU lists qualitative factors that an investor should consider in determining whether the investee’s 

operations are related to the investor’s consolidated operations (e.g., similar operations and common 

employees). The proposed ASU also eliminates the fair value option for equity investments in ASC 

825-10. Under the proposed ASU, any equity investment not accounted for under the equity method of 

accounting is accounted for at fair value, with changes in fair value reported in net income. 

Comment Letters 

Since the ASU’s comment period closed on September 30, 2010, the FASB (and the general public) now 

have significant insight into the observations, opinions, and recommendations of market participants. 

Throughout the open comment period, the FASB received more than 2,600 responses from preparers, 

auditors, and users. 

As it expected might occur, the FASB received a sizable number of comments related to balance sheet 

classification and fair value measurement (including impairment considerations). In general, respondents 

largely supported the proposed changes for hedge accounting; specifically, they supported the lower 

“reasonably effective” threshold and qualitative assessment for hedge effectiveness. Some preparers 

and auditors that had reservations about the proposed dedesignation requirements noted the operating 

challenges involved with maintaining a large day-to-day hedging portfolio. 

In their commentary addressing classification and measurement, many preparers and auditors 

recommended a mixed attribute measurement model, based on an entity’s business strategy, in which an 

entity would (1) record assets held for collection or payment at amortized cost and (2) record assets held 

for trading at fair value through current period earnings. Many respondents expressed reservations about 

fair value measurement, noting that this measurement attribute potentially lacks reliability, especially for 

illiquid instruments, and consequently increases the potential for earnings volatility. 

The sentiments about classification and measurement were echoed in some of the investor comment 

letters, which trended toward a belief that amortized cost is the most relevant measure for both loans 

and an entity’s own debt that the entity intends to hold for collection or payment of cash flows. Although 

amortized cost does not necessarily provide investors with sufficient data to generate price targets and 

recommendations, many in the investor community proposed expanded risk disclosures, including interest 

rate sensitivity and credit risk effect, for loans and own debt instruments. 

From an impairment perspective, most comment letters, irrespective of industry, support the elimination of 

the “probable” threshold to allow for more timely recognition of losses. Furthermore, some believe that a 

lower threshold such as “more likely than not” is necessary. Some preparers and auditors disagreed with 

recognizing the entire expected loss up front and suggested allocating the allowance over the life of the 

instrument. 

Potential Effective Date and Transition 

The FASB deferred proposing an effective date for the ASU until it considers the comments received. Early 

adoption would be prohibited. An entity will transition to the new standard by recording a cumulativeeffect 

adjustment in the statement of financial position for the reporting period that immediately precedes 

the effective date. For example, if the proposed ASU were to be effective for fiscal years beginning after 


December 15, 2013, a calendar-year entity would be required to restate its statement of financial position 

as of December 31, 2013, in its financial report for the first quarter of 2014. 

For nonpublic entities with less than $1 billion in total consolidated assets, certain provisions of the 

proposed ASU would have a deferred effective date for four years after the original effective date of the 

final standard. 

Table 1 — Financial Instrument Classification 

The proposed ASU makes sweeping changes to the recording and measurement attributes of financial 

assets and liabilities. The following table summarizes these changes. 

Topic FASB’s Proposed ASU 

Categories of 

financial assets and 

financial liabilities 

Criteria for amortized 

cost measurement 

Criteria for FV-OCI 

classification 

Reclassification of 

accumulated OCI to 

net income 

Effectively, six categories of financial assets and financial liabilities: 

• FV-NI (default category). 

• FV-OCI (elective for qualifying debt instruments). 

• Amortized cost (elective for qualifying liabilities and short-term payables and receivables). 

• Redemption value (required for certain redeemable investments). 

• Remeasurement approach for core deposits through net income (default category for core 

demand deposit liabilities). 

• Remeasurement approach for core deposits through OCI (elective for qualifying core 

demand deposit liabilities). 

An entity can elect to carry the following financial instruments at amortized cost: 

• Short-term receivables and payables (other than short-term lending arrangements, such 

as credit card receivables) arising in the normal course of business, and due in customary 

terms not exceeding one year, that meet the criteria for classification as FV-OCI (see 

below). 

• Financial liabilities that meet the criteria for classification as FV-OCI (see below), provided 

that measuring the financial liability at fair value would create or exacerbate an accounting 

mismatch. 

An entity can classify a financial asset or financial liability as FV-OCI if it meets all of the following 

criteria: 

• Cash flow characteristics — A debt instrument that cannot contractually be prepaid or 

otherwise settled in such a way that the investor would not recover substantially all of its 

initially recorded investment, other than through its own choice. 

• Business strategy — Business strategy for the instrument is to collect or pay the related 

contractual cash flows. 

• No embedded derivative required to be separated — It is not a hybrid instrument for which 

an embedded derivative is required to be separated under existing U.S. GAAP. 

For instruments in this category, current-period interest accruals, credit losses, and realized gains or 

losses are recognized in earnings. 

Amounts in accumulated OCI are recycled to net income upon sale, settlement, or impairment. 

Equity investments Carried at fair value, with changes in fair value recognized in earnings, except for certain redeemable 

investments that are carried at redemption value, with changes in the redemption value recognized 

in earnings. 


Topic FASB’s Proposed ASU 

Embedded 

derivatives in hybrid 

financial contracts 

Hybrid financial contracts with an embedded derivative, which currently must be bifurcated under 

ASC 815, would instead be measured in their entirety at fair value, with changes in fair value 

recognized in earnings. No embedded derivative would be bifurcated from a hybrid financial asset or 

liability (except for hybrid financial instruments that are outside the proposed ASU’s scope). 

An entity is permitted to classify as FV-OCI hybrid financial contracts that meet the FV-OCI 

classification criteria and that contain an embedded derivative that does not require bifurcation under 

ASC 815. 

Fair value option No explicit fair value option. 

Reclassification Not permitted. 

Table 2 — Comparison of Proposals Under U.S. GAAP and IFRSs 

The FASB’s proposed ASU was written as part of the boards’ broader convergence project; however, 

convergence is incomplete. This table summarizes, by topical area, the differences between proposals 

related to financial instruments under U.S. GAAP and IFRSs. 

Topic FASB’s Proposed ASU Proposed IFRSs 28 

Classification and 

measurement 

Two measurement bases for most financial 

instruments: FV-NI and FV-OCI. 

Amortized cost available for financial liabilities 

with an accounting mismatch. 

No reclassification. 

Three measurement bases for financial 

instruments: FV-NI, FV-OCI, and amortized cost. 

Amortized cost required for certain debt 

instruments. 

Reclassification required in certain cases; 

expected to be uncommon. 

Core deposits Remeasurement value. No special guidance for demand deposit 

liabilities. 

Impairment Only instruments with changes through OCI are 

tested for impairment. 

Embedded 

derivatives 

Single impairment model. 

No separation. 

Same classification approach as for hybrids with 

financial hosts. 

Hedge accounting Qualitative effectiveness, bifurcation by risk for 

hedged financial items. 

Measure at amounts payable on demand. 

Only instruments measured at amortized cost are 

tested for impairment. 

Single impairment model. 

No bifurcation for financial assets. Bifurcation for 

financial liabilities still possible. 

Simplified effectiveness guidance, bifurcation by 

risk for both financial and nonfinancial items. 

Financial Reporting Implications of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act 

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection 

Act (the “Dodd-Frank Act”) into law. The Dodd-Frank Act is arguably the most sweeping change to 

financial regulation in the United States since the changes that followed the Great Depression and was 

created in response to widespread calls for change in the financial regulatory system as a result of the 

near collapse of the world’s financial system in the fall of 2008 and the ensuing global credit crises, which 

some have termed the “Great Recession.” 

28 IASB proposals related to financial assets, fair value option on liabilities, impairment, and the IASB’s tentative decisions related to hedge accounting. 


The Dodd-Frank Act is intended to: 

• Promote U.S. financial stability by “improving accountability and transparency in the financial 

system.” 

• Put an end to the notion of “too big to fail.” 

• “[P]rotect the American taxpayer by ending bailouts.” 

• “[P]rotect consumers from abusive financial services practices.” 

To achieve these broad objectives, Congress included in the legislation many provisions whose magnitude 

will not be fully appreciated until regulators have implemented them by adopting new rules and 

regulations. This section summarizes certain aspects of the Dodd-Frank Act that may have financial 

reporting implications for the financial services industry. 

Permanent Exemption From Section 404(b) of the Sarbanes-Oxley Act of 2002 for 

Smaller Public Entities That Are Nonaccelerated Filers 

The Dodd-Frank Act provides for a permanent exemption for nonaccelerated filers (i.e., public entities 

whose public float is less than $75 million) 29 from the requirement to obtain an external audit on the 

effectiveness of internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 

2002 (the “Sarbanes-Oxley Act”). The Dodd-Frank Act negates SEC Rule 33-9072, issued in October 2009, 

which would have required all nonaccelerated filers to comply with Section 404(b) starting in their annual 

reports for fiscal years ending on or after June 15, 2010. In testimony to the House Financial Services 

Subcommittee, SEC Chairman Mary Schapiro stated that for the brief period between when this provision 

of the Dodd-Frank Act would be effective and when the requirement to comply with Section 404(b) under 

the SEC’s October 2009 final rule became effective, a nonaccelerated filer would not have to comply with 

the SEC rule. On September 15, 2010, the SEC issued Rule 33-9142, which conforms to the exemption 

from Section 404(b) included in the Dodd-Frank Act. 

Establishment of PCAOB Authority Over Auditors of Broker-Dealers 

Under the Sarbanes-Oxley Act, auditors of nonpublic broker-dealers that are registered with the SEC 

currently must be registered with the PCAOB; however, they have not otherwise been subject to PCAOB 

oversight. Under the Dodd-Frank Act, auditors of nonpublic broker-dealers are now subject to PCAOB 

oversight, including its rulemaking power to require an inspection program for such auditors and the 

ability to set standards for their audits. 

The legislation also requires broker-dealers to pay an annual accounting support fee to the PCAOB to 

support the Board’s activities. This fee must be “in proportion to the net capital of the broker or dealer . . . 

compared to the total net capital of all brokers and dealers.” The PCAOB is expected to issue for public 

comment proposed rules on the assessment and collection of these fees. 

Enhancements to the Asset-Backed Securitization Process 

To solve problems in the securitization markets identified during the credit crisis and to better align the 

incentives of the participants in these markets, the Dodd-Frank Act requires that securitizers 30 of financial 

assets “retain an economic interest in a portion of the credit risk” of the assets through investments in the 

securities that the assets back. 31 The legislation stipulates that securitizers must retain at least 5 percent 

of the credit risk of securitized assets (unless certain underwriting standards indicate low credit risk, in 

which case the threshold will be less than 5 percent). In addition, it explicitly prohibits securitizers from 

29 The Dodd-Frank Act exempts issuers that are neither “large accelerated filers” nor “accelerated filers,” as these terms are defined in Rule 12b-2 of the 

Securities Exchange Act of 1934, so the exemption also would extend to debt-only issuers. 

30 The Dodd-Frank Act defines a “securitizer” as “an issuer of an asset-backed security” or “a person who organizes and initiates an asset-backed 

securities transaction by selling or transferring assets, either directly or indirectly, including through an affiliate, to the issuer.” 

31 The Dodd-Frank Act defines an “asset-backed security” as “a fixed-income or other security collateralized by any type of self-liquidating financial asset 

(including a loan, a lease, a mortgage, or a secured or unsecured receivable) that allows the holder of the security to receive payments that depend 

primarily on cash flow from the asset, including — (i) a collateralized mortgage obligation; (ii) a [CDO]; (iii) a collateralized bond obligation; (iv) a 

[CDO] of asset-backed securities; (v) a [CDO] of [CDO]s; and (vi) a security that the [SEC], by rule, determines to be an asset-backed security.” 


hedging or transferring the required retained credit risk and exempts securitizers of qualified residential 

mortgages 32 from the requirement to retain a portion of the credit risk of the underlying assets. Moreover, 

the Dodd-Frank Act directs the SEC to establish rules that would require securitizers to disclose (1) “for 

each tranche or class of security, information regarding the assets backing that security” and (2) “fulfilled 

and unfulfilled repurchase requests across all trusts aggregated by the securitizer.” In October 2010, 

in response to the legislation, the SEC issued proposed rules 33 under which securitizers would disclose 

information about due diligence that either they or third parties performed on the underlying assets as 

well as fulfilled and unfulfilled repurchase requests across all securitization transactions. Comments on the 

proposed rules were due by November 15, 2010. 

Note that in April 2010, the SEC proposed amendments 34 to the reporting requirements and offering and 

disclosure process for ABS. Like the Dodd-Frank Act, the amendments propose a 5 percent minimum 

threshold for the amount of credit risk that a securitizer must retain in a securitization of financial assets. 

However, under the SEC’s amendments, the minimum threshold would be a vertical slice (i.e., the 

securitizer would be required to hold a proportional (minimum) 5 percent interest in the securitization 

vehicle, which amounts to 5 percent of each tranche issued by the vehicle). The Dodd-Frank Act does not 

address this issue. Irrespective of whether the 5 percent interest would be proportional or subordinated, 

entities that use securitizations to fund their operations and (1) did not retain an interest in a vehicle to 

which they transferred assets or (2) retained an interest of less than 5 percent will need to consider how 

the interest that the legislation would require them to hold affects any consolidation and derecognition 

analyses. 

On the basis of a survey of the comment letters submitted to the SEC on the proposed amendments, the 

financial services industry’s views on risk retention can be summarized as follows: 

• Generally, both issuers and investors are in favor of a risk-retention proposal acknowledging the 

need to align the economic interests of originators and sponsors with those of investors. Both 

groups are split, however, on how the risk-retention requirements should be applied. It was 

noted that the majority of those commenting expressed preference for flexibility in the ways in 

which issuers can retain risk (i.e., vertical slice, horizontal slice, retention of randomly selected 

exposures, availability of exceptions, and variations to calibrate risk retention with asset quality) 

and a strong opposition to a one-size-fits-all retention requirement. 

• Most respondents expressed concern regarding the impact of the risk-retention requirement on 

the accounting consolidation analysis for a securitization. The 5 percent risk retention may not, 

in and of itself, trigger consolidation of the securitized vehicle but, coupled with other factors 

such as other recourse requirements or servicing arrangements, may be significant enough to 

trigger consolidation. Respondents called for coordination among the regulators, accounting 

community, and other professionals to avoid unintended consequences related to the securitizers’ 

ability to obtain derecognition. 

• Many respondents called for regulatory harmonization given that the risk-retention 

requirements have been contemplated in the proposed FDIC securitization rule (“safe harbor” 

rule) amendment, the SEC proposed rule on ABS, the European Union capital requirements 

directive amendments, and the Dodd-Frank Act. Respondents made similar comments on the 

accompanying disclosure standards proposed by the SEC and the FDIC and those under the 

Dodd-Frank Act, which are inconsistent. 

32 The Dodd-Frank Act does not define “qualified residential mortgages”; rather, it directs the SEC and other federal agencies to jointly establish a 

definition. 

33 SEC Proposed Rules 33-9150 and 33-9148. 

34 SEC Proposed Rule 33-9117. 


Greater Oversight of Credit Rating Agencies 

The Dodd-Frank Act imposes significant structural, regulatory, and liability reforms on credit rating 

agencies. Most noteworthy for registrants that issue ABS is the elimination of the exemption for credit 

ratings provided by NRSROs from being considered a part of a “registration statement” or certified by a 

“person,” as those terms are used in Sections 7 and 11 of the Securities Act of 1933 (the “Securities Act”). 

Accordingly, to include an NRSRO credit rating in a registration statement, SEC registrants must obtain a 

consent from the NRSRO and file it along with the registration statement. NRSROs would thus be treated 

as “experts” under Section 11 of the Securities Act and would be liable for material misstatements or 

omissions associated with these included ratings. 

On July 27, 2010, the SEC’s Division of Corporation Finance issued new C&DIs on the use of credit 

ratings for issuers not subject to Regulation AB. The new C&DIs provide interpretive guidance on when a 

registrant would be required to name a credit agency as an expert and obtain its consent in conjunction 

with the use of credit rating information in a registration statement. For example, the C&DIs point out that 

“some issuers note their ratings in the context of a risk factor discussion regarding the risk of failure to 

maintain a certain rating and the potential impact a change in credit rating would have on the registrant.” 

In that case and in disclosing other “issuer disclosure-related ratings information” (e.g., changes to a 

credit rating, the liquidity of the registrant, the cost of funds for a registrant, or the terms of agreements 

that refer to credit ratings), the registrant would not be required to obtain a consent from the credit rating 

agency. 

Executive Compensation and Corporate Governance 

The Dodd-Frank Act includes a variety of executive compensation and corporate governance provisions. 

For example, it requires public companies to allow shareholders a nonbinding vote on the compensation 

of named executive officers (NEOs) at least once every three years (“say on pay”). In addition, 

public-company shareholders must be allowed a nonbinding vote to approve any “agreements or 

understandings” that the entity has with its NEOs regarding any type of compensation paid in connection 

with “an acquisition, merger, consolidation, or proposed sale or other disposition of all or substantially 

all the assets of an issuer,” unless such agreements or understandings have been subject to a shareholder 

vote under the general say-on-pay provisions (“say on golden parachutes”). 

In another significant provision of the legislation, the SEC is required to establish rules requiring that 

entities, in the event of an accounting restatement attributable to material noncompliance with financial 

reporting requirements, develop policies mandating the recovery (or “clawback”) of “excess” incentive 

compensation paid to executive officers under incentive plans. Such recovery of incentive compensation 

would be required regardless of whether the executive officer was involved in the misconduct that led to 

the restatement. 

Entities should consider (1) whether the clawback rules, once issued by the SEC, would call into question 

whether the entity has established a grant date 35 in accordance with ASC 718 and (2) the potential 

accounting implications if a grant date has not been established. The accounting for these expanded 

provisions in share-based payment awards is highly dependent on the facts and circumstances. If 

the terms of the provision are broad, subjective, and discretionary, an entity may be precluded from 

establishing a grant date for the award in accordance with ASC 718, since the nature of the provision may 

prevent the employee from reaching a mutual understanding about the key terms and conditions of the 

share-based payment award. If the terms of the provision are clear and measurable, do not allow for the 

entity’s exercise of discretion, and are communicated to the employees, an entity may be able to establish 

a grant date. 

35 See definition of grant date in ASC 718-10-20. 

36 See ASC 718-10-55-108 for the criteria to establish a service inception date before the grant date. 


If an entity determines that the terms of the award do not establish a grant date, the entity must consider 

whether a service inception date exists in accordance with ASC 718. 36 The service inception date is the 

beginning of the requisite service period, which is normally the same as the grant date but may precede 

the grant date if certain criteria are met. The service inception date is important because it is used to 

determine when the recognition of compensation cost begins. If the service inception date criteria are not 

met, an entity would not begin recognizing compensation cost until a grant date has been established. In 

addition, to the extent that entities contemplate changing any of the terms or conditions of their existing 

executive share-based payment plans (or awards) as a result of the Dodd-Frank Act, they should consider 

the guidance on modification accounting in ASC 718. 

Changes to the SIPC 

The Dodd-Frank Act increases (1) the credit line at the U.S. Treasury from $1 billion to $2.5 billion and (2) 

the minimum assessments paid by the SIPC members from $150 per year to two basis points of an SIPC 

member’s gross revenues. 37 

The Volcker Rule 

Named after Paul Volcker, chairman of the Economic Recovery Advisory Board under President Obama, 

the Volcker Rule is intended to reduce the amount of speculative investments on large financial firms’ 

balance sheets and, with limited exception, prohibits any banking entity from engaging in proprietary 

trading or sponsoring, or investing in, hedge funds or private equity funds. An entity should consider 

whether the divestiture of its proprietary trading business would require it to (1) reclassify as available for 

sale the associated securities that it has previously classified as held to maturity and carried at amortized 

cost and (2) measure these securities at fair value and recognize the changes in fair value in OCI. Further, 

to the extent that its proprietary trading business includes any underwater securities for which it has 

accumulated unrealized losses in OCI, an entity should consider whether its intention, or the Act’s 

requirement, to dispose of the securities causes it to realize these losses as an OTTI. 

Regulation of OTC Derivatives 

The Dodd-Frank Act requires entities to clear most OTC derivatives through regulated, central clearing 

organizations and to trade the derivatives on regulated exchanges to increase transparency. With this new 

requirement, entities will have to consider whether these market mechanisms provide a means of net 

settlement, in which case the contracts that previously did not meet the definition of a derivative in ASC 

815-10-15-83 would meet the definition of a derivative and must be measured at fair value, with changes 

in fair value recognized in earnings (provided that they do not qualify for the normal purchases and sales 

scope exception). In addition, banks using the “swaps pushout rule” and pushing their swaps business to 

a bank affiliate should consider whether the pushout affects the makeup of the operating segments that 

they currently disclose in the footnotes. 

Regulation of Advisers to Hedge Funds and Private Equity Funds 

The Dodd-Frank Act requires most managers of hedge funds and private equity funds to register with the 

SEC as investment advisers and provide information about their trades and portfolios that is necessary to 

the assessment of systemic risk. 

37 Section 929V of the Dodd-Frank Act, “Increasing the Minimum Assessment Paid by SIPC Members,” which revises Section 4(d)(1)(C) of the Securities 

Investor Protection Act of 1970 (15 U.S.C. 78ddd(d)(1)(C)). 


Section 2 

SEC Update and Hot Topics 

Introduction 

This section summarizes recent SEC rulemaking activities and legislation that could affect financial 

reporting for various financial services companies. The discussion does not include recent rules related to 

the proxy system and proxy disclosure enhancements. Instead, it focuses on activity that potentially could 

directly affect the financial reporting process. 

SEC Issues Various Proposed and Final Rules and Interpretations 

Affecting Financial Reporting 

SEC Issues Compliance and Disclosure Interpretations on Non-GAAP Measures 

On January 11 and 15, 2010, the SEC’s Division of Corporation Finance issued new C&DIs on the use 

of non-GAAP financial measures. The new guidance provides registrants with more flexibility to disclose 

non-GAAP measures in filings with the SEC. The C&DIs replace the interpretative guidance in the SEC 

staff’s “Frequently Asked Questions Regarding the Use of Non-GAAP Measures” (the “FAQs”), which 

was issued in June 2003, but the rules on non-GAAP financial measures (Regulation G and Item 10(e) of 

Regulation S-K) were not amended. 

Many of the changes reflected in the C&DIs are the result of a recent SEC staff review of its interpretations 

of non-GAAP measures. In December 2009, the SEC staff commented at the AICPA National Conference 

on Current SEC and PCAOB Developments that the purpose of its review was to ensure that non-GAAP 

guidance was not being read “in a fashion that causes companies to keep key information out of their 

filings, which they are otherwise using to tell investors their story [through communications such as 

earnings calls and press releases] and which they believe is the most meaningful indicator of how they are 

doing.” While registrants frequently include non-GAAP financial measures in press releases, many have 

been reluctant to include these same measures in filed documents because of restrictions in the now 

rescinded FAQs. 

Specifically, the C&DIs (1) revised the guidance on nonrecurring, infrequent, or unusual items in FAQs 8 

and 9 and replaced it with C&DI 102.03 and (2) revised the guidance on the meaning of the concept 

“expressly permitted” in FAQ 28 and replaced it with C&DI 106.01. In addition, C&DI 102.04 was added, 

which clarifies that a registrant is not prohibited from “disclosing a non-GAAP financial measure that is not 

used by management in managing its business.” 

SEC Issues Final Rule Removing Requirement for Auditor Attestation Report on 

Internal Control Over Financial Reporting in Annual Reports of Nonaccelerated 

Filers 

On September 15, 2010, the SEC finalized Rule 33-9142, which amends certain SEC rules and forms to 

conform them to Section 404(c) of the Sarbanes-Oxley Act, as added by Section 989G of the Dodd-Frank 

Act. The amendments became effective September 21, 2010. 

The final rule states that under Section 404(c) of the Sarbanes-Oxley Act, Section 404(b) is not applicable 

to “any audit report prepared for an issuer that is neither an accelerated filer nor a large accelerated filer 

as defined in Rule 12b-2 under the Securities Exchange Act of 1934 (the “Exchange Act”).” 

Section 2: SEC Update and Hot Topics 39

SEC Issues Proposed Rule and Interpretive Release to Enhance Short-Term 

Borrowing Disclosures 

On September 17, 2010, the SEC unanimously approved a proposed rule to address temporary declines 

in short-term borrowings — usually around a period-end — commonly referred to as “window dressing.” 

In part, the measures in the proposed rule result from (1) liquidity issues caused by certain transactions 

involving repurchase agreements known as “Repo 105” transactions; (2) SEC inquiries earlier this year of 

registrants to understand the types, extent of use, and accounting for repurchase agreements and other 

similar transactions; and (3) the SEC’s conclusion that there was insufficient disclosure related to these 

types of transactions and other similar arrangements. 

The proposed rule would require registrants to disclose more information about their short-term 

borrowing arrangements and therefore help investors better understand a registrant’s financings during 

a period as well as at period-end. It expands the applicability of disclosure requirements related to shortterm 

borrowings from bank holding companies to all registrants and requires quarterly reporting of shortterm 

borrowings in addition to annual disclosures. Comments were due by November 29, 2010. 

Quantitative Disclosures 

The proposed rule requires registrants to provide the following quantitative disclosures in a tabular format 

in the new subsection within the liquidity and capital resources discussion in MD&A: 

• The balance for each short-term borrowing category at period-end and the weighted-average 

interest rate for those borrowings. 

• The average balance for each short-term borrowing category for the reporting period (including 

the weighted-average interest rate). 

• The maximum balance for each short-term borrowing category for the period (daily maximum for 

financial companies, 1 month-end maximum for all other registrants). 

Qualitative Disclosures 

In addition to the quantitative disclosures, registrants are required under the proposed rule to disclose 

qualitative information within MD&A, including: 

• A general description and the business purpose for the arrangements within each short-term 

borrowing category. 

• The importance of short-term borrowing arrangements and how these arrangements affect 

funding of a registrant’s operations and its risk-management activities (e.g., “liquidity, capital 

resources, market-risk support, credit support or other benefits”). 

• The rationale or context for the maximum level reported for the period as well as significant 

fluctuations between average short-term borrowings for the period and the balance at 

period-end. 

The proposed rule’s requirements would apply to quarterly and annual reports and registration 

statements. For annual reports of financial companies (as defined in the proposed rule), three years 

of annual disclosures and fourth-quarter disclosures would be required. For interim reporting under 

the proposed rule, the same level of disclosure would be required as that for annual reporting. In 

1 In a press release, the SEC noted that under the proposal, a financial company is an entity that is “[e]ngaged to a significant extent in the business of 

lending, deposit-taking, insurance underwriting or providing investment advice [or is a] broker or dealer as defined in Section 3 of the Exchange Act.” 


addition, registrants would be required to identify material changes. For quarterly reports, the proposal 

requires short-term borrowings disclosure information only for the relevant quarter; it does not require 

comparative data. 

The SEC also issued a companion release that provides interpretive guidance intended to improve the 

overall discussion of liquidity and capital resources in MD&A. The guidance in the interpretive release 

became effective September 28, 2010. 

SEC Issues Proposed Rules Addressing Securities and Capital Markets 

SEC Issues Proposed Rules on Asset-Backed Securities 

On April 7, 2010, the SEC issued for public comment a proposed rule on ABS that would significantly 

revise Regulation AB (which governs ABS offerings) and other rules regarding the offering process, 

disclosure, and reporting for ABS. According to Chairman Mary Schapiro, the proposed rules would 

“fundamentally revise the regulatory regime for asset-backed securities.” Some of the provisions of the 

proposed rule include: 

• Revisions to the “filing deadlines for ABS offerings to provide investors with more time” to make 

investment decisions. 

• Elimination of “current credit ratings references in shelf eligibility criteria” and establishment of 

new shelf eligibility criteria for ABS. 

• A “requirement that the sponsor retain a portion of each tranche of the securities that are sold.” 

• A “requirement that prospectuses for public offerings of [ABS] and ongoing [periodic] reports 

contain specified asset-level information about each of the assets in the pool . . . in a tagged data 

format using eXtensible Markup Language (XML),” with some limited exceptions. 

• “[N]ew information requirements for the safe harbors for exempt offerings and resales of [ABS].” 

Specifically, the rule would no longer require that ABS offered publicly through shelf offerings be rated as 

investment grade by NRSROs. Replacing this requirement is a series of proposed safeguards, including a 

requirement for sponsors to retain a minimum of 5 percent of each tranche of securities that are sold on 

an ongoing basis, net of hedging, and a requirement for the chief executive officer of the issuer to certify 

that the securitized assets backing the securities being issued are likely to generate cash flows in amounts 

consistent with what is described in the prospectus. See Section 1 for additional discussion of the riskretention 

requirements for this rule under the Dodd-Frank Act. Comments on the proposed rule were due 

by August 2, 2010. 

In October 2010, the SEC issued two rule proposals, Release 33-9148 and Release 33-9150, on offerings 

of ABS under Sections 943 and 945 of the Dodd-Frank Act, respectively. In Release 33-9148, the 

SEC proposes to (1) require entities that securitize ABS “to disclose fulfilled and unfulfilled repurchase 

requests across all transactions” and (2) “require nationally recognized statistical rating organizations to 

include information regarding the representations, warranties and enforcement mechanisms available 

to investors” of ABS offerings when credit ratings accompany the offering. In Release 33-9150, the SEC 

proposes to require (1) issuers of ABS “to perform a review of the assets underlying the ABS” and “to 

disclose the nature of [their] review of the assets and the findings” and (2) issuers or underwriters of ABS 

to “disclose the third-party’s findings and conclusions,” including certain disclosures about third-party 

due diligence providers, when a third party is engaged to perform the review of underlying assets on the 

issuer’s behalf. The comment period for both proposals ended on November 15, 2010. 


SEC Issues Proposed Rule on Large Trader Reporting System 

On April 14, 2010, the SEC issued for public comment a proposed rule that would establish a new large 

trader reporting system. The proposal is intended to assist the SEC in obtaining information about traders 

that engage in a substantial amount of trading activity to assess the impact of individual trader activity 

on capital markets and to reconstruct activity in periods of unusual market volatility. According to an SEC 

press release about the proposal, the term “large trader” is defined as a person whose transactions “equal 

or exceed two million shares or $20 million during any calendar day, 20 million shares or $200 million 

during any calendar month.” The proposal requires that large traders identify themselves and make certain 

disclosures to the SEC, including among other things, information about the principal place of business, 

nature of the business, identification of accounts, affiliate information, and whether the large trader or 

affiliates are regulated entities. The proposed rule imposes requirements on registered broker-dealers that 

would be required to maintain transaction records for each large trader and to report that information to 

the SEC upon request. Comments on the proposed rule were due by June 22, 2010. 

SEC Issues Proposed Rule on Access to Listed Options Exchanges 

On April 14, 2010, the SEC issued for public comment a proposed rule that would (1) prohibit an 

options exchange from unfairly impeding access to quotations it displays and (2) limit the fees an 

options exchange can charge investors and others wishing to access a quote on an exchange. These two 

measures would make the requirements for access to options markets comparable to those for existing 

rules in stock markets. Comments on the proposed rule were due by June 21, 2010. 

SEC Proposes Consolidated Audit Trail System to Better Track Market Trades 

On May 26, 2010, the SEC issued a proposed rule that would require national securities exchanges and 

national securities associations (“self-regulatory organizations” or SROs) to establish a consolidated audit 

trail system. In announcing the proposed rule, Chairman Schapiro referred to the May 6 crash, which 

saw an unprecedented one-time drop in major indexes in a relatively short period. In the aftermath, Ms. 

Schapiro conceded that regulators’ efforts to “reconstruct the trading on that day are substantially more 

challenging and time consuming than we would have liked because no standardized, automated system 

exists to collect data across the various trading venues, products and market participants.” The goal of the 

proposed rule is to address potential gaps in regulators’ abilities to detect illegal trading activity involving 

multiple markets and products. Problems with the existing system include significant volumes resulting 

from computerized trading and the lack of uniformity in, and cross-market compatibility of, current SRO 

audit trails. Under the proposed rule, SROs would file jointly with the Commission, within 90 days of 

approval of the proposed rule, a national market system (NMS) plan to create, implement, and maintain a 

consolidated audit trail. In addition, SROs would be required to provide certain data to a central repository 

within one to two years after the NMS plan becomes effective. Comments on the proposed rule were due 

by August 9, 2010, and certain comment letters have highlighted concerns about confidentiality of the 

information submitted and the potential risk of front-running trading patterns from institutional investors. 

SEC Finalizes Rules Addressing Securities and Capital Markets 

SEC Issues Final Rule on Amendment to Municipal Securities Disclosure 

On May 27, 2010, the SEC issued Final Rule 34-62184A, which amends certain requirements regarding 

the information to be made available for primary offerings of municipal securities. Under the current 

regulatory framework, municipal securities are not subject to the disclosure requirements of federal 

securities laws. Accordingly, this rule is intended to enhance information provided to investors by 

regulating those that underwrite or sell municipal securities. In a press release announcing the unanimous 


vote on the final rule, Chairman Schapiro hinted at further regulation down the road when she 

commented, “Although I believe that the [SEC’s] regulatory authority over the municipal securities market 

should be expanded in order to better protect investors and issuers alike, [these measures] represent an 

important improvement within our present statutory authority.” 

The final rule changes and expands Rule 15c2-12 of the Exchange Act as follows: 

• Increases scope of securities subject to the rule — The amendments remove the exemption 

that existed; new issuances of variable rate demand obligations are now subject to the rule’s 

provisions. 

• Changes requirements for disclosure of important events — The rule previously required an 

underwriter to reasonably determine that the issuer or obligated person agreed to provide notice 

of specified events. Because the amendments eliminate the materiality threshold for providing 

notice to the Municipal Securities Rulemaking Board, disclosure of certain events will be required 

as outlined in the rule, regardless of materiality. In addition, the list of events for which notice is 

to be provided is expanded to include “(1) tender offers; (2) bankruptcy, insolvency, receivership 

or similar proceeding . . . ; (3) the consummation of a merger, consolidation, or acquisition 

involving . . . the sale of all or substantially all of the assets of the obligated person [or their 

termination], if material; and (4) appointment of a successor or additional trustee, or the change 

of name of a trustee, if material.” 

• Clarifies deadline for reporting on events — The revised rule requires that a broker, dealer, or 

municipal securities dealer reasonably determine that the issuer or obligated person has agreed 

to provide notice of specified events in a timely manner not in excess of 10 business days after 

the event’s occurrence. Previously, the rule required notice of events listed in the rule to be made 

“in a timely manner.” 

The compliance date of the new rules was December 1, 2010. 

SEC Extends Compliance Date for Amendments to Regulation SHO 

The SEC extended for a limited period the compliance date for the amendments to Rule 201 and 

Rule 200(g). Rule 201 requires exchanges to implement a short-sale-related circuit breaker that, when 

triggered, would impose a restriction on the prices at which securities may be sold short. The amendments 

to Rule 200(g) provide that a broker-dealer may mark certain qualifying short sale orders “short exempt.” 

The Commission is extending the compliance date for these amendments to give certain exchanges and 

industry participants additional time to modify their current procedures and provide time for programming 

and compliance tests to determine adherence to the rules. As a result, the SEC changed the compliance 

date for these amendments from November 20, 2010, to February 28, 2011. 

Risk Management Controls for Brokers or Dealers with Market Access 

The SEC finalized Rule 34-63241, which requires brokers or dealers with access to trading securities 

directly on an exchange or alternative trading system “to establish, document, and maintain a system 

of risk management controls and supervisory procedures that, among other things, are reasonably 

designed to (1) systematically limit the financial exposure of the broker or dealer that could arise as a 

result of market access, and (2) ensure compliance with all regulatory requirements that are applicable 

in connection with market access.” These controls and procedures must also be reasonably designed to 

prevent orders that appear erroneous or exceed certain preset credit or capital thresholds. 


Furthermore, the rule requires a broker or dealer with market access to establish a system for monitoring 

the effectiveness of its programs and controls and implement a process to address any issues promptly. 

The broker or dealer must conduct a review no less frequently than annually to ensure the overall 

effectiveness of its risk management controls, and the overall system of controls and annual review 

process must be certified annually by the chief executive officer (or equivalent officer) of the broker or 

dealer. 

The rule will be effective 60 days from the date of its publication in the Federal Register, and once 

effective, broker-dealers subject to the rule will have six months to comply with its requirements. 

Recent Legislation 

Financial Reporting and Disclosure Implications of the Health Care Reform 

Legislation 

On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act. 

Seven days later, the president signed into law a reconciliation measure, the Health Care and Education 

Reconciliation Act of 2010. The passage of the Patient Protection and Affordable Care Act and the 

reconciliation measure (collectively, the “Act”) has resulted in comprehensive health care reform legislation. 

The effects of the Act on the U.S. economy could be as sweeping as those resulting from the passage of 

Medicare and Social Security. 

Entities will need to identify and plan for changes related to accounting and disclosures that will result 

from the Act. For example, public entities may need to add disclosures about the positive or negative 

impact of the Act in their financial statements and MD&A in periodic reports (such as Forms 10-K and 

10-Q filings) and registration statements. Registrants will also need to consider the Act’s effect and 

potentially provide additional disclosure of any material trends and uncertainties that are known or 

reasonably expected in accordance with Regulation S-K, Item 303. 

In addition, although each public entity will need to analyze the Act on the basis of its own facts 

and circumstances to determine what, if any, disclosure should be made in its securities filing, certain 

provisions of the Act that are more likely to warrant disclosure considerations for an entity that is not 

operating in a health-care-related industry include the following: 

• Changes to Medicare Part D subsidy — An entity offering retiree prescription coverage that is 

equal to or greater than the Medicare prescription coverage is entitled to a subsidy. Before the 

Act, entities were allowed to deduct the entire cost of providing the retiree prescription coverage 

even though a portion was offset by the subsidy. However, under the Act, the tax deductible 

prescription coverage is now reduced by the amount of the subsidy. As a result, some entities 

will be forced to take a noncash charge in connection with the impairment of their deferred tax 

assets related to the Medicare Part D subsidy. Because of the increased cost resulting from the 

elimination of the deductibility of the Medicare Part D subsidy, entities will need to determine 

whether changes to their current retiree medical benefits are warranted. To the extent that 

such charges are taken and they are material, disclosure about the charge may be needed in an 

entity’s financial statements and MD&A. 

• Excise tax on “Cadillac plans” — Beginning in 2018, the Act imposes a nondeductible 40 percent 

excise tax on the “excess benefit” provided under Cadillac plans. An excess benefit is a benefit 

whose annual cost exceeds $10,200 a year for individuals or $27,500 for families. The excise tax 

will make Cadillac plans significantly more expensive than they are currently, and the tax could be 


a factor that entities take into account as they determine whether to change or continue to offer 

Cadillac plans. Disclosure may be required if entities start modifying their Cadillac plans to avoid 

the excise tax. 

• Disclosure controls and procedures, and ICFR — The Act may cause a public entity to implement 

new, or modify existing, ICFR and disclosure controls and procedures. 

SEC Support of Convergence and Global Accounting Standards 

SEC Publishes Work Plan for Moving Forward With IFRSs for U.S. Issuers 

On February 24, 2010, the SEC issued a statement expressing its strong commitment to the development 

of a single set of high-quality globally accepted accounting standards. The statement emphasizes the 

importance of the FASB’s and IASB’s convergence efforts and of the completion of such efforts in 

accordance with the boards’ current time table (i.e., by mid-2011). It directs the SEC staff to execute a 

work plan addressing specific areas of concern that have been highlighted in comment letters to the SEC. 

The purpose of the work plan is to provide the Commission with the information it needs to make a wellinformed 

decision regarding the use of IFRSs by U.S. issuers. The statement and work plan do not contain 

any specific adoption dates or transition methods (e.g., wholesale conversion, a standard-by-standard 

phase-in, continued convergence). This approach is consistent with Chairman Schapiro’s remarks that the 

FASB’s and IASB’s current convergence projects “must first be successfully completed” before a final ruling 

can be made on the use of IFRSs by U.S. issuers. 

To provide information about the work plan and the SEC’s progress, the Commission added a page to its 

Web site that focuses on its considerations related to incorporating IFRSs into the U.S. financial reporting 

system for domestic issuers. The new page contains various SEC documents related to IFRSs, and while 

the SEC did not solicit formal feedback on the work plan, the page offers a mechanism for constituents to 

provide comments to the Commission. 

In an effort to obtain further feedback from constituents, on August 12, 2010, the SEC published two 

releases (33-9133 and 33-9134) requesting comment on a number of topics related to whether the 

Commission should incorporate IFRSs into the financial reporting system for U.S. issuers. Comments on 

the releases were due by October 18, 2010. 

On October 29, 2010, in accordance with the SEC’s commitment to provide frequent public progress 

reports beginning no later than October 2010, the SEC staff issued its first public progress report on the 

staff’s efforts and observations to date under the work plan. For each of the six areas of concern identified 

in the work plan, the progress report summarizes the plan’s objectives as well as the SEC staff’s efforts in 

executing it and its preliminary observations to date, as applicable. 

As noted in the progress report, “[m]any of the Staff’s efforts are currently in process and are not expected 

to be completed until 2011, particularly as they relate to consideration of the sufficient development and 

application of IFRS for the U.S. domestic reporting system and the independence of standard setting for 

the benefit of investors.” The SEC staff intends to continue to report periodically on the status of the work 

plan. 

After the FASB’s and IASB’s current convergence projects are completed, the Commission will determine 

whether to incorporate IFRSs into the U.S. financial reporting system. The February 2010 statement 

indicates that this determination will be in 2011, in line with the timeline in the SEC’s 2008 proposed 

roadmap for IFRSs adoption. The February 2010 statement also removes the early adoption option 

presented in the proposed roadmap for periods beginning on or after December 15, 2009; however, the 


statement leaves open the possibility for an early adoption option upon a final decision in 2011. Decisions 

on these issues will be made in the context of the information received as part of executing the work plan. 

The statement notes that if in 2011 the SEC votes to incorporate IFRSs into the financial reporting system 

for U.S. issuers, it will do so through the official rulemaking process, with a proposed rule that will be 

open for comment. The SEC will consider the comments before finalization of the rule and allow sufficient 

transition time, with U.S. issuers reporting under such a system no earlier than 2015. 

Note that while this timetable is preliminary, the initial roadmap proposed by the Commission in 2008 

did not provide any relief from the SEC’s current reporting requirements related to presentation of three 

years of comparative information. If these requirements are maintained, U.S. issuers may have to present 

comparative IFRS information in their 2013 financial statements. 


Section 3 

FASB and IASB Update 

Introduction 

This section discusses recently issued FASB standards and proposals, certain joint projects between 

the FASB and IASB, and current and proposed international standards issued by the IASB that are not 

the result of joint projects between the IASB and FASB. Other standard-setting activities, including 

consolidations, transfers of financial assets, loan accounting, impairments and TDRs, fair value, and 

accounting for financial instruments are covered in Section 1. Standard-setting activity that is primarily 

applicable only to a specific industry sector is addressed within the applicable sector supplement. 

FASB Accounting Standard Updates 

Lending Arrangements of Entity’s Own Shares in Contemplation of Convertible 

Debt Issuance or Other Financing (ASU 2009-15) 

On October 13, 2009, the FASB issued ASU 2009-15, which reflects the consensus reached by the EITF in 

Issue 09-1. 

Entities that issue convertible debt may also execute share-lending arrangements on their own shares 

for below-market consideration (usually for the par value of the shares lent to the investment bank) with 

the investment bank underwriting that issuance. These share-lending arrangements typically require the 

investment bank to return the shares to the issuer within a specified period and reimburse the issuer for 

any dividends paid on those shares while the lending arrangement is outstanding. Although the sharelending 

arrangement with the underwriter is executed at below-market rates, the issuer benefits under the 

arrangement by completing the issuance of the convertible debt for a lower underwriting fee or a lower 

interest rate than would otherwise be attainable. 

The ASU requires an entity that enters into a share-lending arrangement on its own shares (that are 

classified in equity pursuant to other authoritative accounting guidance) in contemplation of a convertible 

debt issuance (or other financing) to initially measure the share-lending arrangement at fair value and 

treat it as an issuance cost with an offset to additional paid-in capital. The entity would exclude the shares 

borrowed under the share-lending arrangement from basic and diluted EPS. If, however, dividends on the 

loaned shares are not reimbursed to the entity, those dividend amounts and any participation rights in 

undistributed earnings attributable to the loaned shares would reduce the income available to common 

shareholders in a manner consistent with the two-class method. 

If it becomes probable that the share-lending arrangement counterparty will default on the arrangement 

(not return the entity’s shares within the specified period), the issuing entity should record a loss in 

current earnings that is equal to the fair value of the shares outstanding less any recoveries. The entity will 

continue to adjust the loss until actual default. On the basis of the guidance for contingently returnable 

shares, upon default (not when default is probable), the issuing entity will include the shares outstanding 

under the share-lending arrangement (net of any share recoveries) in basic and diluted EPS. 

The ASU also requires entities to provide certain disclosures about the share-lending arrangement, 

including (1) a description of the share-lending arrangement, including all significant terms; (2) the entity’s 

reason for entering into the arrangement; (3) the maximum potential economic loss as of the balance 

sheet date (e.g., the fair value of the loaned shares currently outstanding); (4) the EPS treatment of the 

shares underlying the arrangement; (5) the unamortized carrying amount of issuance costs associated with 

the share-lending arrangement; and (6) if applicable, the current income statement and expected effect 

on EPS of a default by the counterparty. 

Section 3: FASB and IASB Update 47

The ASU is effective for new share-lending arrangements issued in periods beginning on or after June 

15, 2009. For all other share-lending arrangements, the ASU is effective for fiscal years, and interim 

periods within those fiscal years, beginning on or after December 15, 2009. The ASU should be applied 

retrospectively to arrangements that are outstanding on the effective date. 

Distributions to Shareholders With Components of Stock and Cash (ASU 2010-01) 

On January 5, 2010, the FASB issued ASU 2010-01, which reflects the consensus reached by the EITF in 

Issue 09-E. The ASU “affects entities that declare dividends to shareholders that may be paid in cash or 

shares at the election of the shareholders with a potential limitation on the total amount of cash that all 

shareholders can elect to receive in the aggregate.” 

The ASU requires that in calculating EPS, an entity should account for the share portion of the distribution 

as a stock issuance and not as a stock dividend. In other words, the entity will include the shares issued or 

issuable as part of a distribution in basic EPS prospectively. From the date the entity commits itself to pay 

a dividend that has components of cash and shares to the time the dividend is actually distributed, the 

entity needs to consider other GAAP in accounting for the commitment to distribute cash and shares as 

a liability and that commitment’s effect on basic EPS, diluted EPS, or both. ASC 480-10-25-14 requires an 

entity to record a liability for any obligation that may be settled in a variable number of equity shares. 

The ASU is effective for interim and annual periods ending on or after December 15, 2009, and should be 

applied retrospectively to all prior periods. 

Subsequent Events (ASU 2010-09) 

On February 24, 2010, the FASB issued ASU 2010-09, which contains amendments to certain recognition 

and disclosure requirements of ASC 855. The ASU amends ASC 855 to indicate that the period through 

which subsequent events are evaluated is based on whether an entity is (1) an SEC filer or a conduit debt 

obligor or (2) another entity. If an entity is either an SEC filer or a conduit debt obligor, the ASU requires 

it to evaluate subsequent events through the date on which the financial statements are issued. All 

other entities are required to evaluate subsequent events through the date their financial statements are 

available to be issued. This evaluation may require significant judgment, and an entity’s determination is 

an accounting policy election that, once made, should be applied consistently. 

Date Disclosure Exemption for SEC Filers 

The ASU amends ASC 855-10-50-1 to clarify that SEC filers are not required to disclose the date through 

which subsequent events have been evaluated and whether that date is the date the financial statements 

were issued or available to be issued. All entities other than SEC filers must still comply with the disclosure 

requirements. However, the date-disclosure exemption does not relieve management of an SEC filer from 

its responsibility to evaluate subsequent events through the date on which financial statements are issued. 

That is, the evaluation of subsequent events must still be performed. 

The ASU defines “revised financial statements” as “financial statements revised either as a result of 

correction of an error or retrospective application of [U.S. GAAP].” Upon revising its financial statements, 

an entity is required to update its evaluation of subsequent events through the date the revised financial 

statements are issued or are available to be issued. The ASU also notes that non-SEC filers should disclose 

“both the date that the financial statements were issued or available to be issued and the date the 

revised financial statements were issued or available to be issued” if the financial statements have been 

revised. An SEC filer is not required to disclose in its revised financial statements the date through which 

subsequent events have been evaluated. 


Effective Date 

For all entities (except conduit debt obligors), the ASU was effective upon issuance for financial statements 

that are (1) issued or are available to be issued or (2) revised. For conduit debt obligors, the ASU is 

effective for interim and annual periods ending after June 15, 2010. 

Scope Exception Related to Embedded Credit Derivatives (ASU 2010-11) 

On March 5, 2010, the FASB issued ASU 2010-11, which addresses application of the embedded 

derivative scope exception in ASC 815-15-15-8 and 15-9. The ASU primarily affects entities that hold or 

issue investments in financial instruments that contain embedded credit derivative features (including 

entities that consolidate a VIE that issues financial instruments containing embedded credit derivative 

features), and its provisions could affect the accounting for many types of investments, including CDOs 

and synthetic CDOs. However, other entities may also benefit from the ASU’s transition provisions, which 

permit entities to make a special one-time election to apply the fair value option to any investment 

in a beneficial interest in securitized financial assets, regardless of whether such investments contain 

embedded derivative features. 

Clarification of Scope Exception 

The amendments to ASC 815-15-15-8 and 15-9 clarify that the “transfer of credit risk that is only in the 

form of subordination of one financial instrument to another . . . is an embedded derivative feature that 

should not be subject to potential bifurcation [analysis under ASC] 815-10-15-11 and [ASC] 815-15-25” 

(emphasis added). Consequently, embedded credit derivative features in a financial instrument other 

than those resulting from subordination do not qualify for the scope exception. The final ASU cites three 

specific examples of embedded derivative features that would not qualify for the scope exception: 

• An embedded derivative feature related to another type of risk (including another type of credit 

risk). 

• A derivative feature embedded in a tranche of a securitized financial instrument whose holder 

could be compelled to make additional future payments (i.e., the holder’s risk goes beyond 

merely receiving reduced cash flows for its investment) even if the possibility of such an outcome 

is remote. The Board believes that when an interest’s terms expose the investor to possibly 

losing more than its initial investment, the related transfer of credit risk is not only in the form of 

subordination of one financial instrument to another. 

• A derivative feature embedded in an interest in a single-tranche securitization vehicle. Because 

there is no subordination in such a vehicle, it cannot qualify for the scope exception. 

When the scope exception cannot be applied, the investor must assess the embedded derivative feature 

for potential bifurcation and separate accounting under ASC 815-10-15-11 and ASC 815-15-25. 

If an entity determines that its investment has (1) an embedded credit derivative feature related to 

subordination that qualifies for the scope exception and (2) a second embedded derivative feature that 

requires bifurcation (e.g., a feature related to a written credit default swap held in the securitization trust), 

the entity would determine the fair value of the derivative that must be bifurcated on the basis of the 

derivative’s expected cash flows as affected by the subordination provisions even though no separate 

derivative is recognized for the embedded credit derivative feature created by subordination. 


The chart below illustrates the application of the scope exception in ASU 2010-11: 

All embedded 

derivative features 

would need to 

be evaluated for 

possible bifurcation. 

Disclosures 

Yes 

Beneficial Interest 

(Assume that (1) the fair value option has not 

been applied to the interest and (2) the interest 

is not a derivative in its entirety.) 

Yes 

All embedded 

derivative features, 

including any 

subordination 

features, would 

need to be 

evaluated for 


Is this an interest 

in a single tranche 

structure? 

Section 3: FASB and IASB Update 50 

No 

Is there a possibility, 

however remote, 

that the investor 

could be required to 

pay more than the 

initial investment? 

Yes 

• Embedded credit 

derivative feature 

created by the 

subordination of one 

tranche to another 

qualifies for the scope 

exception under ASC 

815-15-15-9. 

• Analyze all other 

embedded features for 


No 

In the securitization 

structure, is 

there a transfer 

of risk between 

tranches due to 

subordination? 

No 

Analyze all 

embedded features 

for possible 

bifurcation. 

Although the ASU does not create any new disclosure requirements, it clarifies that the disclosure 

requirements detailed in ASC 815-10-50-4K for sellers of credit derivatives do not apply to embedded 

credit derivative features related only to subordination that qualify for the scope exception in ASC 815-15- 

15-9. However, the disclosure requirements in ASC 815-10-50-4K will continue to apply to other credit 

derivatives, including those embedded in hybrid contracts.


The ASU is effective on the first day of the first fiscal quarter beginning after June 15, 2010. Therefore, for 

a calendar-year-end entity, the ASU becomes effective on July 1, 2010. Early adoption is permitted at the 

beginning of any fiscal quarter beginning after March 5, 2010. 

Upon adoption, an entity must assess certain preexisting contracts to determine whether the accounting 

for such contracts is consistent with the amended guidance in the ASU; however, an entity can avoid 

having to perform such assessments if it opts instead to apply the fair value option to those contracts. 

Upon adoption of the ASU, an entity “may elect the fair value option for any investment in a beneficial 

interest in a securitized financial asset [and] measure that investment in its entirety at fair value (with 

changes in fair value recognized in earnings)” (emphasis added). Although the ASU’s guidance is written 

from the perspective of the holder of the investment, the issuer of the interest also would be permitted to 

apply the fair value option. This fair value election is determined instrument by instrument, is irrevocable, 

and must be “supported by documentation completed by the beginning of the fiscal quarter of initial 

adoption.” Any cumulative unrealized gains and losses associated with contracts to which the fair value 

option is applied will be reported as part of the cumulative-effect adjustment to beginning retained 

earnings for the period of adoption. 

The transition provisions for contracts that are reassessed at adoption (for which the fair value option is 

not elected) are as follows: 

• Contracts containing embedded derivative features that no longer qualify for the scope 

exception — An entity must assess whether the embedded credit derivative feature or features 

require bifurcation. If bifurcation is required, the carrying amounts of the components of the 

hybrid instrument are determined as though a pro forma bifurcation occurred at the inception of 

the hybrid instrument and the host contract was subsequently accounted for up to the date of 

adoption of the ASU. Any difference between the total carrying amount of the components of 

the newly bifurcated hybrid instrument and the carrying amount of the hybrid instrument before 

bifurcation will be recognized as a cumulative-effect adjustment to beginning retained earnings 

for the period of adoption. 

• Previously bifurcated contracts containing embedded derivative features that now qualify for the 

scope exception — An entity would recognize the recombined hybrid instrument at a carrying 

value equal to the sum of the carrying values of each individual component on the date of 

adoption. No cumulative-effect adjustment to beginning retained earnings will be recognized. 

The ASU specifies that an entity must disclose “the gross gains and gross losses that make up the 

cumulative-effect adjustment, determined on an instrument-by-instrument basis.” Such gains and losses 

are composed of (1) cumulative unrealized gains and losses associated with contracts to which the fair 

value option is applied and (2) gains and losses arising from the pro forma bifurcation applied to hybrids 

for which the entity did not opt to apply the fair value option. An entity may also choose to separately 

disclose the gains and losses associated with either component (1) or (2). Prior periods cannot be restated. 

Loan Modifications When the Loan Is Part of a Pool That Is Accounted for as a 

Single Asset (ASU 2010-18) 

On April 29, 2010, the FASB issued ASU 2010-18. The ASU affects entities that modify a loan that is 

currently accounted for as part of a pool of loans that, when acquired, had deteriorated in credit quality, 

as outlined in ASC 310-30. 


The ASU indicates that a modification to a loan that is part of a pool accounted for under ASC 310-30 

should not result in removal of the loan from the pool. This restriction on removal of a loan from a pool 

includes loan modifications that would otherwise qualify as TDRs under ASC 310-40 had the loan not 

been part of a pool. Therefore, entities should not evaluate whether a modification of loans (that are part 

of a pool accounted for under ASC 310-30) meets the criteria for a TDR in ASC 310-40. 

Modified loans should not be removed from the pool unless either of the following conditions from ASC 

310-30-40-1 is met: 

a. The investor sells, forecloses, or otherwise receives assets in satisfaction of the loan. 

b. The loan is written off. 

The ASU also permits a one-time election for entities to change the unit of accounting from a pool basis 

to an individual loan basis. Such an election would be applied on a pool-by-pool basis. This would allow 

entities that make the election to apply the guidance in ASC 310-40 on TDRs to individual loans in the 

event of future loan modifications. 

This ASU is effective for any modifications of a loan or loans accounted for within a pool in the first 

interim or annual reporting period ending on or after July 15, 2010, and will be applied prospectively. 

Disclosures About the Credit Quality of Financing Receivables and Allowance for 

Credit Losses (ASU 2010-20) 

On July 21, 2010, the FASB issued ASU 2010-20, which amends ASC 310 by requiring more robust and 

disaggregated disclosures about the credit quality of an entity’s financing receivables and its allowance 

for credit losses. The objective of enhancing these disclosures is to improve financial statement users’ 

understanding of (1) the nature of an entity’s credit risk associated with its financing receivables and (2) 

the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the 

allowance and the reasons for those changes. 

Scope and Potential Impact 

The ASU applies to all public and nonpublic entities with financing receivables, which are defined as a 

contractual right to receive money on demand or on fixed or determinable dates that is recognized as 

an asset in the entity’s statement of financial position. Thus, examples of financing receivables include 

loans, trade accounts receivable, notes receivable, credit cards, and lease receivables (other than operating 

leases). 

Under the ASU, certain types of financing receivables are not subject to the new and amended disclosure 

requirements, including (1) short-term trade accounts receivable (other than credit card receivables); (2) 

receivables measured at fair value, with changes in fair value recorded in earnings; and (3) receivables 

measured at the lower of cost or fair value. The ASU also specifically excludes from the definition of 

financing receivables (1) debt securities, (2) unconditional promises to give, and (3) acquired beneficial 

interests or the transferor’s beneficial interests in securitized financial assets. 

New and Amended Disclosure Requirements 

The ASU’s new and amended disclosure requirements focus on the following five topics: 

1. Nonaccrual and past due financing receivables . . . 

2. Allowance for credit losses related to financing receivables . . . 


3. Impaired loans [individually evaluated for impairment] 

4. Credit quality information . . . 

5. Modifications. 

The disclosures above are to be presented at a specified level of aggregation, with the allowance for 

credit losses and qualitative information related to modifications of financing receivables presented at 

the portfolio-segment level. A portfolio segment is defined in the ASU as the “level at which an entity 

develops and documents a systematic methodology to determine its allowance for credit losses.” For 

example, a portfolio segment may be defined by (1) the different types of financing receivables (e.g., 

mortgage loans, auto loans), (2) the industry to which the financing receivable relates, or (3) the differing 

risk rates. 

An entity must provide all other disclosures from the list above by class of financing receivable, which is 

generally a disaggregation of a portfolio segment and is determined on the basis of the nature and extent 

of an entity’s exposure to credit risk arising from financing receivables. At a minimum, classes of financing 

receivables must be first (1) segregated on the basis of the measurement attribute (amortized cost and 

present value of amounts to be received) and then (2) disaggregated to the level that an entity uses when 

assessing and monitoring the risk and performance of the portfolio (including the entity’s assessment of 

the risk characteristics of the financing receivables). 

The following table provides greater detail of the disclosures listed above by category. 

Category Does Not Apply To New and Amended Disclosures 

Nonaccrual 

and Past 

Due 

Financing 

Receivables 

1. Short-term trade accounts 

receivable (except for 

credit card receivables). 

2. Financing receivables 

measured at fair value, 

with changes in fair value 

recorded in earnings. 


measured at lower of cost 

or fair value. 

4. Loans acquired with 

deteriorated credit quality. 

By class of financing receivable: 

1. In an entity’s summary of significant accounting policies, its policies for: 

• Placing financing receivables on nonaccrual status. 

• Recording payments received on nonaccrual financing receivables. 

• Resuming accrual of interest. 

• Determining past due or delinquency status. 

2. The “recorded investment in financing receivables on nonaccrual status” and 

those “past due 90 days or more and still accruing.” 

3. An analysis of the age of the recorded investment in financing receivables that 

are past due (determined on the basis of the entity’s policy), at the end of the 

reporting period. 



Allowance 

for Credit 

Losses 

Related to 

Financing 

Receivables 

Impaired 

Loans 

(Individually 

Evaluated for 

Impairment) 











4. Lessor’s net investments in 

leveraged leases. 

Editor’s Note: Impaired 

loan disclosures do not apply 

to loans measured at (1) fair 

value, with changes in fair 

value recorded in earnings, 

and (2) loans measured at 

the lower of cost or fair value 

because credit losses have 

already been reflected in 

earnings. 

By portfolio segment: 

1. A description of the “accounting policies and methodology used to estimate 

the allowance for credit losses.” 

2. A description of management’s “policy for charging off uncollectible financing 

receivables.” 

3. “The activity in the allowance for credit losses for each period.” 

4. For each income statement presented, the quantitative effect on an entity’s 

current-period provision for credit losses resulting from an entity changing its 

accounting policy and methodology used to estimate the allowance for credit 

losses from the prior period. 

5. “The amount of any significant purchases of financing receivables during each 

reporting period.” 

6. “The amount of any significant sales of financing receivables or reclassifications 

of financing receivables to held for sale during each reporting period.” 

7. “The balance in the allowance for credit losses at the end of each period 

disaggregated on the basis of the entity’s impairment method” (i.e., separate 

presentation for financing receivables that are evaluated collectively for 

impairment (under ASC 450-20), those that are evaluated individually for 

impairment (under ASC 310-10-35), and loans acquired with deteriorated 

credit quality (under ASC 310-30)). 

8. “The recorded investment in financing receivables at the end of each period 

related to each balance in the allowance for credit losses,” disaggregated 

on the basis of impairment method (i.e., separate presentation for financing 

receivables that are evaluated collectively for impairment (under ASC 450-20), 

those that are evaluated individually for impairment (under ASC 310-10-35), 

and loans acquired with deteriorated credit quality (under ASC 310-30)). 


1. The accounting for impaired loans. 

2. The amount of impaired loans. 

3. The recorded investment in the impaired loans, including the recorded 

investment for which there is a related allowance (and the allowance amount 

itself) and for which there is no related allowance. 

4. The total unpaid principal balance of the impaired loans. 

5. “The entity’s policy for recognizing interest income on impaired loans, 

including how cash receipts are recorded.” 

6. For each income statement presented, the “average recorded investment in 

the impaired loans,” “the related amount of interest income recognized during 

the time . . . the loans were impaired,” and the “amount of interest income 

recognized using a cash-basis method of accounting during the time within 

that period that the loans were impaired, if practicable.” 

7. The entity’s policy for determining which loans the entity individually assesses 

for impairment. 

8. The factors the entity considered in determining that the loan is impaired. 



Credit 

Quality 

Information 

Modifications 

1 





















4. Loans acquired with 

deteriorated credit quality 

that are accounted for 

within a pool. 



1. Quantitative and qualitative information about the credit quality of financing 

receivables, including: 

• A description of the credit quality indicator. 

• The recorded investment in financing receivables by credit quality indicator. 

• For each credit quality indicator, the date or range of dates in which the 

information was updated for that credit quality indicator. 

2. If internal risk ratings are disclosed, the entity must provide qualitative 

information about how those internal risk ratings relate to the likelihood of 

loss. 

For each income statement presented: 

1. For TDRs of financing receivables that occurred during the period: 

• Qualitative and quantitative information, by class of financing receivable, 

about (a) how “the financing receivables were modified” and (b) the 

“financial effects of the modifications.” 

• Qualitative information by portfolio segment about how “modifications 

are factored into the determination of the allowance for credit losses.” 

2. For “financing receivables modified as troubled debt restructurings within the 

previous 12 months and for which there was a payment default during the 

period”: 

• Qualitative and quantitative information by class of financing receivable, 

including the types and the amounts of financing receivables that 

defaulted. 

• Qualitative information by portfolio segment “about how such defaults are 

factored into the determination of the allowance for credit losses.” 

For public entities, the new and amended disclosures that relate to information as of the end of a 

reporting period will be effective for the first interim or annual reporting periods ending on or after 

December 15, 2010. That is, for calendar-year-end public entities, most of the new and amended 

disclosures in the ASU would be effective for the quarter and year ending December 31, 2010. However, 

the disclosures that include information for activity that occurs during a reporting period will be effective 

for the first interim or annual periods beginning after December 15, 2010. Those disclosures include (1) 

the activity in the allowance for credit losses for each period and (2) disclosures about modifications of 

financing receivables. For calendar-year-end public entities, those disclosures would be effective for the 


The FASB has separately proposed a limited-scope deferral for those disclosures related to modifications 

of financing receivables (i.e., TDRs) to synchronize the effective date with the FASB’s project on TDR 

classification. The expected effective date for the TDR classification project will be for interim and annual 

periods ending after June 15, 2011, for public entities. 

For nonpublic entities, all disclosures will be required for annual reporting periods ending on or after 

December 15, 2011. That is, for calendar-year-end nonpublic entities, the new and amended disclosures 

in the ASU would be effective for the year ending December 31, 2011. 

1 This disclosure guidance applies “only to a creditor’s troubled debt restructurings of financing receivables” and to “a creditor’s modification of a lease 

receivable that meets the definition of a troubled debt restructuring.” 


Comparative disclosures for earlier reporting periods that ended before initial adoption are encouraged 

but not required. However, the ASU requires entities to provide comparative disclosures for reporting 

periods that end after initial adoption. 

Proposed FASB Accounting Standard Updates 

Disclosure of Certain Loss Contingencies 

On July 20, 2010, the FASB issued a proposed ASU that would (1) expand the scope of loss contingencies 

subject to disclosure to include certain remote contingencies; (2) increase the quantitative and qualitative 

disclosures entities must provide to enable users to assess the “nature, potential magnitude, and potential 

timing (if known)” of loss contingencies; and (3) for public entities, require a tabular reconciliation for 

changes in amounts recognized for loss contingencies. 

Scope 

The proposed ASU would apply to all loss contingencies under ASC 450-20 and ASC 805. Regarding 

loss contingencies, the proposed ASU states that an “entity shall disclose qualitative and quantitative 

information . . . to enable financial statement users to understand” the “nature of the loss contingencies,” 

their “potential magnitude,” and their “potential timing (if known).” 

Accordingly, an entity’s disclosures about a contingency should “be more extensive as additional 

information about a potential unfavorable outcome becomes available” and as the contingency nears 

resolution. Disclosures of similar contingencies may be aggregated so that disclosures are understandable 

and not too detailed. 

The proposed amendments would not change an entity’s requirement to recognize loss contingencies 

that are probable and to disclose loss contingencies that are at least reasonably possible (although 

the information actually disclosed would most likely change). However, certain remote contingencies 

would require disclosure if, because of their nature, potential magnitude, or potential timing (if known), 

disclosure would be “necessary to inform users about the entity’s vulnerability to a potential severe 

impact” (“special remote”). ASC 275-10-20 defines severe impact, in part, as a “significant financially 

disruptive effect on the normal functioning of an entity. Severe impact is a higher threshold than 

material. . . . The concept of severe impact, however, includes matters that are less than catastrophic.” 

Qualitative Disclosures 

Entities would be required to disclose the following qualitative information about a loss contingency that 

meets the threshold for disclosure (i.e., probable, reasonably possible, or special remote) or classes 

(types) of similar contingencies: 

• Information about the nature and risks of the loss contingency. 

• For individually material contingencies, information that is sufficiently detailed to enable users to 

“obtain additional information from publicly available sources such as court records.” This could 

include: 

1. The name of the court or agency in which the proceedings are pending 

2. The date instituted 

3. The principal parties to the proceedings 


4. A description of the factual basis alleged to underlie the proceedings 

5. The current status of the litigation contingency. 

• When applicable, the basis for aggregation and “information that would enable financial 

statement users to understand the nature, potential magnitude, and potential timing (if known) 

of loss.” 

In addition, for asserted litigation contingencies, entities should make the following disclosures: 

• During early stages, the contentions of the parties (e.g., the basis for the claim amount, the 

amount of damages claimed, the basis for the entity’s defense or that the entity has not yet 

formulated its defense). 

• More extensive disclosures as additional information about a potential unfavorable outcome 

becomes available (e.g., as progress is made toward resolution, or as the likelihood and 

magnitude of a loss increase). 

• For individually material asserted litigation contingencies, the anticipated timing/next steps (if 

known). 

Quantitative Disclosures 

For all loss contingencies that meet the threshold for disclosure (i.e., probable, reasonably possible, or 

special remote), an entity would disclose: 

• Publicly available quantitative information (e.g., the amount claimed by the plaintiff or damages 

indicated through expert witness testimony). 

• Other nonprivileged information that would help users understand the potential magnitude of 

the possible loss. 

• Information about potential recoveries from insurance and other sources, but only if (1) such 

information “has been provided to the plaintiff(s) in a litigation contingency [or] is discoverable 

by either the plaintiff or a regulatory agency” or (2) a receivable has been recognized. “If the 

insurance company has denied, contested, or reserved its rights related to the entity’s claim for 

recovery, an entity shall disclose that fact.” 

In addition, if a loss contingency is probable or reasonably possible, an entity would disclose an 

estimate of the possible loss or range of loss and the amount accrued (if any), unless an estimate cannot 

be made, in which case the entity would state that fact and explain its reasons. If an entity has insurance 

or other recoveries related to its loss contingencies, the potential recovery amounts are not netted (offset) 

against amounts accrued for loss contingencies. The proposed ASU would also require public entities to 

present a table reconciling the total aggregate amount of contingencies recognized in the statement of 

financial position at the beginning and end of the period. Presentation of the table would be required 

for each period for which an income statement is presented. The reconciliation should be presented 

separately for each class of contingencies so that dissimilar contingencies are not aggregated. 

In addition to the beginning and ending balances, the table would show the following: 

• Increases in amount accrued for new loss contingencies recognized. 

• Increases for changes in estimates for amounts previously recognized. 


• Decreases for changes in estimates for amounts previously recognized. 

• Decreases in cash payments or other forms of settlement. 

Further, an entity would be required to provide a qualitative description of any significant activity included 

in the table. The entity must also disclose which line item in the statement of financial position contains 

the loss contingency amounts. An entity would not need to disclose contingencies that arise and are 

resolved in the same period (except those recognized in a business combination). 


For public entities, the ED proposed that the amendments would be effective for fiscal years ending after 

December 15, 2010, and interim and annual periods in subsequent fiscal years. For nonpublic entities, 

the proposed amendments would be effective for the first annual period beginning after December 

15, 2010, and for interim periods of fiscal years after the first annual period. Early adoption would be 

permitted. Comparative disclosures would only be required for periods ending after initial adoption. In 

recent deliberations, however, the FASB clarified that the amendments will not be effective for 2010 

annual financial statements of public calendar-year-end entities as originally proposed. The Board will 

discuss a revised effective date in future redeliberations, which are currently expected to begin in the 

second half of 2011. 

Reconsideration of Effective Control for Repurchase Agreements 

On November 3, 2010, the FASB issued a proposed ASU that amends the guidance in ASC 860 on 

accounting for certain repurchase agreements (“repos”). Specifically, the amendments propose to 

eliminate the collateral maintenance provision that a company uses to determine whether a transfer of 

financial assets in a repo transaction is accounted for as a sale or as a secured borrowing. The elimination 

of the collateral maintenance provision from a company’s assessment of effective control over transferred 

financial assets in a repo may cause more repos to be accounted for as secured borrowings rather than as 

sales. 

The proposed ASU would be effective for interim and annual periods beginning after the final ASU is 

issued (expected in the first quarter of 2011) and would be applied prospectively to new transfers and 

existing transactions that are modified after the effective date. Early adoption would be prohibited. 

Comments on the proposed ASU are due by January 15, 2011. 

Joint Projects of the FASB and IASB 

Statement of Comprehensive Income 

On May 26, 2010, the FASB issued for public comment a proposed ASU that would amend ASC 220 

(formerly Statement 130) by requiring all components of comprehensive income to be reported in a 

continuous financial statement. The proposed ASU applies to all entities that provide a full set of financial 

statements that report financial position, results of operations, and cash flows. In addition, investment 

companies, defined benefit pension plans, and other employee benefit plans that are exempt from the 

requirements to provide a statement of cash flows would be within the scope of the new guidance. Under 

the proposed ASU, an entity would do the following: 

• Report comprehensive income and its components in a continuous financial statement (which 

must be displayed as prominently as other full sets of financial statements) in two sections: (a) net 

income and (b) OCI. 


• Display a total for each section of net income and OCI. 

• Display each component of net income and each component of OCI in the financial statement. 

The proposed ASU does not change the items that must be reported in OCI, nor does it change the option 

for a preparer to show components of comprehensive income net of the effect of income taxes as long 

as the preparer shows the tax effect for each component in the notes to the financial statement or on the 

face of the statement of comprehensive income. 

On May 26, 2010, the IASB also issued an ED on the presentation of OCI that is largely the same as 

the FASB’s proposed ASU. The FASB plans to align the ASU’s effective date with that of the IASB in its 

proposed ASU on financial instruments, which will be determined when it considers the comments 

received on the proposed standards. The FASB and IASB expect to issue a final converged standard in the 


Financial Instruments With Characteristics of Equity 

This project on improving and simplifying the financial reporting for financial instruments considered to 

have one or more characteristics of equity has been ongoing for a number of years. It was formally added 

as a joint convergence project in July 2008. 

In their deliberations, the two boards developed a new classification approach that was expected to be 

exposed for public comment in early 2011. However, after providing a staff draft of the ED to certain 

constituents, the boards received a significant number of comments. The overriding concern was that the 

proposal lacked key principles and would result in inconsistent classification, practice issues related to the 

classification criteria, and increased structuring opportunities. 

In October 2010, the FASB and IASB met to consider how to proceed with the project. Given the concerns 

raised about the draft proposal and the significant effort necessary for the boards to deliberate the issues, 

the boards agreed to defer further deliberation on this project until June 2011 at the earliest. 

Revenue Recognition: Revenue From Contracts With Customers 

On June 24, 2010, the FASB and IASB jointly issued a proposed ASU that gives entities a single 

comprehensive model to use in reporting information about the amount and timing of revenue resulting 

from contracts to provide goods or services to customers. The proposed ASU, which would apply to 

any entity that enters into contracts to provide goods or services, would supersede most of the current 

revenue recognition guidance. The effective date has yet to be determined. 

Scope 

The scope of the proposed ASU includes all contracts with customers except (1) those within the scope 

of ASC 840 (on leases) or ASC 944 (on insurance), (2) certain contractual rights or obligations within the 

scope of other ASC topics (including ASC 310 on receivables, ASC 320 on debt and equity securities, ASC 

405 on extinguishment of liabilities, ASC 470 on debt, ASC 815 on derivatives and hedging, ASC 825 

on financial instruments, and ASC 860 on transfers and servicing), (3) guarantees (other than product 

warranties) within the scope of ASC 460, and (4) nonmonetary exchanges whose purpose is to facilitate a 

sale to another party. 


Key Provisions 

The core principle under the proposed ASU is that an entity must “recognize revenue to depict the transfer 

of goods or services to customers in an amount that reflects the consideration that it receives, or expects 

to receive, in exchange for those goods or services.” In applying the provisions of the proposed ASU to 

contracts within its scope, an entity would: 

Disclosures 

(a) identify the contract(s) with a customer; 

(b) identify the separate performance obligations in the contract; 

(c) determine the transaction price; 

(d) allocate the transaction price to the separate performance obligations; and 

(e) recognize revenue when the entity satisfies each performance obligation. 

The proposed ASU requires entities to disclose both (1) quantitative and qualitative information about the 

amount, timing, and uncertainty of revenue (and related cash flows) from contracts with customers and 

(2) the judgment, and changes in judgment, they exercised in applying the provisions of the proposed 

ASU. The disclosures required by the proposed ASU would significantly expand those currently required by 

existing revenue standards and would include: 

• Information about the nature of customer contracts and related accounting policies. 

• A disaggregation of reported revenue (in categories that best depict how the amount, timing, 

and uncertainty of revenues and cash flows are affected by economic characteristics). 

• A reconciliation of the beginning and ending contract assets and liabilities. 

• Information about performance obligations (e.g., types of goods or services, payment terms, 

timing). 

• Information about onerous contracts, including the extent and number of such contracts and the 

reasons they became onerous. 

• A description of the principal judgments used in accounting for contracts with customers. 

• Information about the methods, inputs, and assumptions used in determining and allocating 

transaction prices. 

Amendments for Common Fair Value Measurement and Disclosure Requirements 

in U.S. GAAP and IFRSs 

On June 29, 2010, the FASB issued a proposed ASU on fair value measurement and disclosure that is the 

result of the FASB’s and IASB’s joint project to develop a single, converged fair value framework. Under 

the proposal, fair value measurement and disclosure requirements in U.S. GAAP would be nearly identical 

to those in IFRSs. The proposed ASU would make certain changes to how the fair value measurement 

guidance in ASC 820 is applied. Key items within the proposal address the following areas. 


Highest-and-Best-Use and Valuation-Premise Concepts 

The proposed ASU amends the guidance on the highest-and-best-use and valuation-premise concepts by 

clarifying that they do not apply to financial assets but only to measuring the fair value of nonfinancial 

assets. The boards concluded that financial assets and liabilities “do not have alternative uses,” and thus 

the concepts would not apply. 

Measuring the Fair Value of Financial Instruments That Are Managed Within a Portfolio 

The proposed ASU provides an exception to fair value measurement when a reporting entity holds a group 

of financial assets and financial liabilities that have offsetting positions in market risks or counterparty 

credit risk that are managed on the basis of its net exposure to either of those risks. That is, when an 

entity has a portfolio in which the market risks (e.g., interest rate risk, currency risk, other price risks) being 

offset are substantially the same, “the reporting entity shall apply the price within the bid-ask spread that 

is most representative of fair value in the circumstances to the reporting entity’s net exposure to those 

market risks.” 

In addition, when there is a legally enforceable right to offset one or more financial assets and financial 

liabilities with a counterparty (e.g., a master netting agreement), “the reporting entity shall include 

the effect of the reporting entity’s net exposure to the credit risk of that counterparty in the fair value 

measurement.” 

The proposal outlines the following criteria an entity must meet to use the exception: 

Reference Market 

a. Manages the group of financial assets and financial liabilities on the basis of the reporting 

entity’s net exposure to a particular market risk (or risks) or to the credit risk of a particular 

counterparty in accordance with the reporting entity’s documented risk management or 

investment strategy 

b. Provides information on that basis about the group of financial assets and financial liabilities to 

the reporting entity’s management (for example, the reporting entity’s board of directors or 

chief executive officer) 

c. Manages the net exposure to a particular market risk (or risks) or to the credit risk of a particular 

counterparty in a consistent manner from period to period 

d. Is required to or has elected to measure the financial assets and financial liabilities at fair value 

in the statement of financial position at each reporting date. 

The reference market for a fair value measurement is the principal (or, in the absence of a principal, 

most advantageous) market, provided that the entity has access to that market. The principal market is 

presumed to be the market in which the entity normally transacts. The proposal also indicates that 

(1) an entity does not need to perform an exhaustive search for markets that might have more activity 

than the market in which the entity normally transacts but (2) the entity should consider information that 

is reasonably available. 

Application to Liabilities 

In the fair value measurement of a liability (whether financial or nonfinancial), it is assumed that the 

liability continues and the market participant transferee assumes responsibility for the obligation. The 

proposal requires that when using a present value technique to determine the fair value of a liability, a 

reporting entity take into consideration the future cash flows that a market participant would require as 


compensation for taking on and fulfilling the obligation. The guidance also provides examples of how that 

compensation may be reflected in the fair value of a liability. 

Application to Instruments Classified in Shareholders’ Equity 

No guidance currently exists on measuring the fair value of an instrument classified in shareholders’ equity. 

The proposed ASU specifies that “the objective of a fair value measurement of an instrument classified in 

a reporting entity’s shareholders’ equity . . . is to estimate an exit price from the perspective of a market 

participant who holds the instrument as an asset at the measurement date.” 

Blockage Factors 

The proposal clarifies that the application of a blockage factor is prohibited at all levels of the fair value 

hierarchy and notes that a “blockage factor is not relevant and, therefore, shall not be used when fair 

value is measured using a valuation technique that does not use a quoted price for the asset or liability 

(or similar assets or liabilities).” The boards indicated that the prohibition on using blockage factors is 

necessary because blockage is “specific to that reporting entity, not to the asset or liability.” Entities 

that currently apply a blockage factor to assets and liabilities categorized within Level 2 of the fair 

value hierarchy (that are measured on the basis of quoted prices) could be affected by these proposed 

amendments. The Board does not expect other Level 2 and Level 3 fair value measurements to be 

affected. 

Disclosures 

The proposed ASU requires entities to disclose information about measurement uncertainty in the form 

of a sensitivity analysis for recurring fair value measurements categorized in Level 3 of the fair value 

hierarchy unless another Codification topic specifies that such disclosure is not required (e.g., investments 

in unquoted equity instruments are not included in the scope of the disclosure requirement under the 

accounting for financial instruments’ EDs). Specifically, the amendment to ASC 820-10-50-2(f) states that 

an entity would disclose the following: 

A measurement uncertainty analysis for fair value measurements categorized within Level 3 of the 

fair value hierarchy. If changing one or more of the unobservable inputs used in a fair value measurement 

to a different amount that could have reasonably been used in the circumstances would have 

resulted in a significantly higher or lower fair value measurement, a reporting entity shall disclose 

the effect of using those different amounts and how it calculated that effect. When preparing a 

measurement uncertainty analysis, a reporting entity shall not take into account unobservable inputs 

that are associated with remote scenarios. A reporting entity shall take into account the effect of 

correlation between unobservable inputs if that correlation is relevant when estimating the effect 

on the fair value measurement of using those different amounts. For that purpose, significance shall 

be judged with respect to earnings (or changes in net assets) and total assets or total liabilities, or, 

when changes in fair value are recognized in other comprehensive income, with respect to total equity. 

[Emphasis added] 

In addition, the proposal: 

• Requires disclosure when “the highest and best use of an asset differs from its current use.” 

In this instance, a reporting entity discloses the reason its use of the asset is different from the 

highest and best use. 

• Requires disclosure of fair value by level for each class of assets and liabilities not measured at fair 

value in the statement of financial position but for which the fair value is disclosed. 


• Amends the Level 3 reconciliation requirements. ASU 2010-06 recently amended ASC 820 

to require disclosure of significant transfers between Level 1 and Level 2 of the fair value 

hierarchy. The proposed ASU amends the disclosure requirement to include any transfers 

between Level 1 and Level 2 of the fair value hierarchy. 


The proposed ASU does not yet specify an effective date. The FASB plans to add one after considering the 

comments it receives on the proposal. If a change occurs in the fair value measurement of an item as a 

result of applying the amendments in the proposed ASU, the transition would be applied via a cumulativeeffect 

adjustment in beginning retained earnings in the period of adoption. The additional proposed 

disclosures would be required prospectively. That is, a reporting entity would provide those disclosures for 

periods beginning after the amendments in the proposed ASU are effective. 

Current Project Status 

The boards are currently jointly deliberating comments received on the proposal and anticipate issuing 

final standards during the first quarter of 2011. On the basis of the boards’ decisions, the fair value 

measurement and disclosure requirements to be issued under IFRSs are expected to be nearly identical to 

those in the proposed ASU, with the following key exceptions (other exceptions may exist): 

• Certain style differences (e.g., differences in spelling and differences in references to other U.S. 

GAAP and IFRSs). 

• The assets, liabilities, and equity instruments measured at fair value under IFRSs may differ from 

those measured at fair value under U.S. GAAP as a result of the different measurement bases 

prescribed by other literature under IFRSs or U.S. GAAP (e.g., currently the measurement bases 

for financial instruments are different under IFRSs and U.S. GAAP). 

• Differences in the recognition of day-one gains or losses that arise when the initial fair value of 

an asset or liability differs from the transaction price. For example, under IAS 39, gains and losses 

related to unobservable market data are precluded from immediate recognition. Under U.S. 

GAAP, there is no similar requirement. 

• Differences related to the U.S. GAAP guidance on NAV per share. This guidance provides a 

practical expedient that, under certain circumstances, permits an entity to measure the fair value 

of investments in certain entities that apply investment-company accounting on the basis of 

NAV per share. The IASB is not including this guidance in IFRSs because there are no equivalent 

investment-company accounting requirements under IFRSs. 

• Differences in disclosure requirements. For example, IFRSs do not require a reporting entity to 

distinguish between recurring and nonrecurring fair value measurements. In addition, amounts 

disclosed in Level 3 of the fair value hierarchy may differ because under IFRSs, net presentation 

for derivatives generally is not permitted. 

Financial Statement Presentation 

On July 1, 2010, the FASB and IASB posted to their respective Web sites a staff draft of an ED on financial 

statement presentation. The staff draft reflects the boards’ tentative decisions through April 2010. Since 

the issuance of the staff draft, the staffs of the FASB and IASB have conducted outreach with financial 

statement preparers, financial statement users, and the European Financial Reporting Advisory Group. 


At the October 2010 joint board meeting in London, members of both the FASB and IASB expressed 

various concerns over the direction of the project. Concerns include the complexity and cost of 

implementation as well as questions about first addressing other priorities, such as what is considered 

performance (i.e., the conceptual basis of OCI) and when should OCI be recycled. In addition, some board 

members felt that an overhaul of the financial statements should only be implemented after the major 

projects currently on the boards’ agenda have been fully implemented. 

The boards requested that the staff (1) continue with their outreach activities and (2) develop a project 

plan that would allow for continuation of discussions after the June 2011 deadline for several other 

projects. 

Discussion Paper on Effective Dates and Transition Methods 

On October 19, 2010, the FASB and IASB issued a discussion paper and a request for views, respectively, 

to obtain feedback from their stakeholders on (1) the time and effort they would need to adopt several 

new and significant accounting and reporting standards and (2) the dates on which those new standards 

should be effective. The documents are not identical; however, both address certain projects that are 

being developed jointly by the boards. On the basis of the responses, the FASB and IASB plan to develop 

an implementation plan whose main objective will be to help stakeholders properly manage the cost and 

pace of these changes. 

Scope 

The FASB is seeking effective date and transition input on most, but not all, of its current standard-setting 

projects. The following projects are within the scope of the discussion paper: 

• Accounting for financial instruments and revisions to the accounting for derivative instruments 

and hedging activities (ED issued May 2010). 

• Balance sheet — offsetting (ED expected to be issued during the fourth quarter of 2010). 

• Revenue recognition — revenue from contracts with customers (ED issued June 2010). 

• Leases (ED issued August 2010). 

• Financial statement presentation (timing of the ED is unknown). 

• Discontinued operations (ED expected to be issued during the second quarter of 2011). 

• Financial instruments with characteristics of equity (timing of the ED is unknown). 

• Insurance contracts (discussion paper issued September 2010). 

• Comprehensive income (ED issued May 2010). 

Transition Methods 

A tentative decision about each of the project’s transition methods has been reached. When determining 

whether retrospective or prospective application was the more appropriate method, the FASB weighed 

the costs and practicability of applying the standards retrospectively with the benefits of comparability. 

Feedback on these methods is being sought for each individual document. The FASB also seeks feedback 

on the time and costs of implementing the proposals on the basis of its tentative decisions on transition 

methods. 


Effective Dates 

The effective dates of the projects within the discussion paper’s scope would be either (1) the same date 

for all projects (what some have termed the “big bang”) or (2) separate dates for each respective project 

(a staggered approach). The FASB has asked stakeholders for input on the two alternatives, including the 

perceived advantages and disadvantages of each. Comments on the discussion paper are due by January 

31, 2011. 

Financial Instruments — Offsetting 

The issue of offsetting of financial instruments in the statement of financial position was added to the 

financial instruments project during the summer of 2010. This issue is most relevant for the netting of 

multiple derivative asset and liability positions between an entity and the same counterparty. 

Under IAS 32, to offset a financial asset and financial liability, there must be a legally enforceable right to 

set off the two amounts and the intention to settle the positions either on a net basis or simultaneously. 

This intention must apply in all circumstances, not just in bankruptcy. 

The IASB and FASB have held joint discussions to date on the topic of offsetting. Outreach conducted 

with financial statement users indicated that there was no general consensus of views. Credit analysts 

would prefer to see both the net (in the statement of financial position) and gross (in footnote disclosure) 

exposure for derivatives; however, equity analysts would prefer to have the gross exposures on the face of 

the statement of financial position. 

The boards have tentatively agreed that offsetting would be required when an entity has the 

unconditional right of offset and intends to settle the asset and liability either net or simultaneously (“at 

the same moment”). The boards have also tentatively agreed not to permit conditional-right offsetting 

such as in the event of bankruptcy with a master netting agreement in place. The tentative decision 

is aligned with the current guidance in IAS 32 but would represent a significant change to U.S. GAAP 

because under current guidance, the intent to set off does not have to be considered with respect to 

derivatives subject to a master netting agreement. As a result, generally fewer derivatives qualify for net 

presentation under IFRSs than under U.S. GAAP. 

Consolidation 

The financial crisis highlighted the potential for entities, often in the financial services industry, to be 

exposed to risks not reflected on their balance sheet. Some referred to this off-balance-sheet financing as 

a “shadow” banking system. That shadow banking system included an alphabet soup of structures such 

as ABS trusts, CDOs, synthetic CDOs, structured investment vehicles (SIVs), CP conduits, and sponsored 

money market and hedge funds. Because the financial crisis created enormous stress on the financial 

system, many of these off-balance-sheet structures were supported by their financial institution sponsor 

either as a result of contractual requirements (e.g., liquidity facilities) or because of the underlying 

reputational risk of allowing these structures, and their investors, to fail. 

The IASB had been discussing potential changes to its consolidation standards since 2002, but as the 

financial crisis deepened, pressure to reassess the consolidation requirements increased, particularly 

in connection with the guidance for structured entities under SIC-12. In April 2008, the Financial 

Stability Board issued to the G7 Ministers and Central Bank Governors a report recommending the IASB 

immediately address the accounting and disclosures for off-balance-sheet arrangements while working 

toward global convergence. The G20 leaders then issued a declaration at their November 2008 meeting 

that, among other things, called for the improvement of accounting and disclosure standards for 

off-balance-sheet vehicles. 


Consolidation Proposals 

In December 2008, the IASB released ED 10 and, after subsequent deliberations with the FASB, expects 

to issue a final standard in the first quarter of 2011. Although the FASB recently issued its own updates to 

consolidation accounting for VIEs, the FASB has participated in the IASB’s deliberations and plans to issue 

the IASB standard as an ED. 

The new consolidation model will focus on a reporting entity’s having control, which is defined as having 

the power to direct the activities of another entity to generate returns for the reporting entity. Power 

would be the current ability to direct the activities of an entity that significantly affect the returns. The 

reporting entity must be exposed to the variability of the entity through upside risk, downside risk, or 

both. 

Instances in which a reporting entity may have the current ability to direct the activities of another entity 

include having: 

i. More than half of the voting rights in an entity controlled by voting rights 

ii. Contractual rights within other contractual arrangements that related to the substantive activities 

of the entity 

iii. A combination of contractual rights within other contractual arrangements and holding voting 

rights in the entity. 

A reporting entity may also direct the activities of another entity by “holding less than half of the voting 

rights in an entity considering relevant facts and circumstances.” 2 

Investment Entity Considerations 

The FASB’s subsequent deliberations have also focused on consolidation considerations of investment 

entities. Unlike U.S. GAAP, under which investment companies are exempt from applying consolidation 

accounting to their funds’ investments (unless those investments are also investment companies), there 

is currently no similar scope exception under IFRSs. The FASB is expected to issue an ED in the second 

quarter of 2011 to exempt investment entities from consolidation when they meet certain criteria related 

to their: 

• Business purpose. 

• Investment activity. 

• Exit strategy. 

• Unit ownership. 

• Pooling of funds. 

• Use of fair value for reporting purposes. 

The original decisions of both boards was that the fair value accounting at the investment company 

level would not be retained at the investment manager level unless that manager is also an investment 

company. Therefore, an investment manager would consolidate all controlled investees, including those 

2 A reporting entity that holds less than half of the voting rights in an entity may need to rely on other indicators of power, such as whether it can 

obtain additional voting rights from holding potential voting rights, whether the entity’s operations are dependent on the reporting entity, or the size 

of their voting rights relative to that of any other voting rights holder. Potential voting rights such as options and convertible instruments should be 

considered when assessing whether a reporting entity has the power to direct the activities of an entity. 


held by investment company subsidiaries. However, the FASB recently reversed its previous decision and 

will now permit the retention of fair value accounting at the parent level. The boards have not discussed 

the issue since the FASB’s decision, so it remains to be seen whether the IASB will follow suit or whether 

there will continue to be divergence in this area under U.S. GAAP and IFRSs. 

Disclosures 

Along with the consolidation standard, the IASB also expects to issue an IFRS related to disclosures 

for subsidiaries, joint ventures, associates, and unconsolidated structured entities in the fourth quarter 

of 2010. A reporting entity will be required to provide information about (1) its involvements with 

unconsolidated structured entities and (2) structured entities in which the reporting entity is the sponsor 

but no longer has an involvement as of the reporting date. In addition, for consolidated entities with 

NCIs, additional disclosure will be required, including the name of the subsidiary, the subsidiary location 

of incorporation or residence, the method for allocating profits and losses to the NCI (and if not on a pro 

rata ownership basis, the portion of voting rights held by the NCI), and summarized financial information 

for the subsidiary. 

IFRS Update 

Amendments to IFRS 9 Related to Accounting for Financial Liabilities 

Classification and measurement of financial assets was the first phase of the project to reform the 

accounting for financial instruments to be finalized, resulting in the issuance of IFRS 9 in November 

2009. That project originally included classification and measurement of financial liabilities; however, 

because of the accelerated time frame of the project and contention over the measurement of some 

financial liabilities at fair value, liability measurement was separated into its own project. The IASB recently 

completed the second phase, measurement of financial liabilities, resulting in amendments to IFRS 9 in 

October 2010. The guidance within the amendments to IFRS 9 on accounting for financial liabilities is 

similar to the guidance previously held in IAS 39 except for the two notable exceptions discussed below. 

Removal of Cost Exception for Unquoted Derivative Instruments 

The initial version of IFRS 9 removed the cost exception in IAS 39 for unquoted equity instruments 

and related derivative assets when fair value was not reliably determinable. These amendments to 

IFRS 9 removed that exception for derivative liabilities so they too would no longer be eligible for cost 

measurement and would be measured at fair value. 

Separation of Credit Risk 

As the term implies, in a liability designated under IAS 39 as “at fair value through profit or loss,” the 

entire change in fair value of the liability is recognized in profit and loss. However, the amendments 

to IFRS 9 provide a significant change in presentation of such a liability. Under these amendments, the 

amount of change in a liability’s fair value attributable to changes in the credit risk of the liability would 

be recognized in OCI, with the remaining amount of change in fair value recognized in profit and loss. 

The amount of credit losses recognized in OCI would not be recycled to profit and loss, even if the liability 

were settled at fair value (i.e., an amount less than the outstanding principal balance). 

However, if recognizing the change in fair value attributable to credit risk within OCI would create or 

exacerbate an accounting mismatch, an entity would then present the entire change in fair value within 

profit and loss. The determination of whether an accounting mismatch exists is made at initial recognition 

of the liability and is not reassessed. 


The guidance related to identifying credit risk as part of measuring liabilities at fair value through profit 

or loss differentiates credit risk from asset risk (the risk that a single asset or a group of assets will not 

perform sufficiently) and provides examples of asset risk. One of the examples of asset risk provided in 

the standard is that of an SPE, for example, an ABS trust or a CDO structure. The assets of the SPE are 

legally isolated to fund the debt securities issued by the vehicle. If the assets do not generate sufficient 

cash flows, the security holders begin absorbing losses based on their level of seniority within the waterfall 

of the tranched securities. Entities consolidating SPEs would not be required to identify the accounting 

mismatch because the changes in fair value of the outstanding notes would be attributable to items other 

than credit risk (e.g., asset risk, interest rate risk, liquidity risk). 

The amendments also provide guidance on isolating the change in fair value of a liability attributable to 

credit risk as either (1) the change in fair value not attributable to changes in market risk (i.e., changes in 

a benchmark interest rate, the price of another entity’s financial instruments, a commodity price, a foreign 

exchange rate, or an index of prices or rates) or (2) an alternative method that more faithfully represents 

credit risk. When the only significant changes in market conditions are changes in an observable 

benchmark interest rate, the amendments also provide specific guidance on how to measure the credit 

risk. 

The amendments also include new disclosure requirements for financial liabilities under IFRS 7. Those 

disclosure requirements include: 

• The cumulative amount of change in the fair value of a liability attributable to changes in credit 

risk. 

• The difference between the carrying amount of the liability and the contractual obligation at 

maturity. 

• During the current period, any transfers of the cumulative gains or losses within equity and the 

reason for the transfer. 


The effective-date guidance related to these amendments follows the same approach within IFRS 9 

(e.g., early adoption would be permitted but also must be applied to all other finalized requirements in 

IFRS 9 previously issued). The IASB also decided to require (1) retroactive application of the requirements 

and (2) that the determination of whether an accounting mismatch exists be based on the facts and 

circumstances that exist as of the date of the amendments’ initial application. 

Amendments to Derecognition Disclosures Under IFRS 7 

The derecognition project was originally added to the IASB’s agenda in July 2008 in response to (1) 

the then ongoing financial crisis and (2) issues that resulted from the transfer of assets from financial 

institutions’ balance sheets while the institutions maintained various forms of continuing involvement with 

such assets. Although derecognition was intended to be a convergence project, the SEC requested that 

the FASB follow an accelerated timetable to amend its own derecognition requirements. 

In April 2009, the IASB published ED/2009/3, which proposed (1) a new derecognition model and (2) 

an alternative model, both based on control of the transferred assets. However, the responses to the ED 

largely opposed use of the proposed model. In June 2010, the IASB reprioritized its work plan, which 

included delaying the derecognition project indefinitely. 


Instead, the board shifted its focus to increasing the level of transparency and comparability in disclosures 

of financial asset transfers. In October 2010, the IASB issued amendments to IFRS 7 that increase 

the disclosure requirements for transactions involving financial asset transfers by providing greater 

transparency about risk exposures of transactions in which a financial asset is transferred but the transferor 

retains some level of continuing involvement in the asset. 

The amendments clarify that the disclosure requirements apply to transfers of all or part of a financial 

asset if the entity: 

(a) [T]ransfers the contractual rights to receive the cash flows of that financial asset; or 

(b) [R]etains the contractual rights to receive the cash flows of that financial asset, but assumes a 

contractual obligation to pay the cash flows to [other recipients] in an arrangement. 

An entity has continuing involvement in a transferred financial asset if it “retains any of the contractual 

rights or obligations inherent in the transferred financial asset or obtains any new contractual rights or 

obligations relating to the transferred financial asset.” 

For transfers of financial assets that do not qualify for derecognition, an entity must disclose information 

that will enable users to understand the relationship between transferred financial assets that are not 

derecognized in their entirety and the associated liabilities. For each class of financial asset, the entity is 

required to disclose: 

(a) [T]he nature of the transferred assets. 

(b) [T]he nature of the risks and rewards of ownership to which the entity is exposed. 

(c) [A] description of the nature of the relationship between the transferred assets and the associated 

liabilities, including restrictions arising from the transfer on the reporting entity’s use of 

the transferred assets. 

(d) [W]hen the counterparty (counterparties) to the associated liabilities has (have) recourse only 

to the transferred assets, a schedule that sets out the fair value of the transferred assets, the 

fair value of the associated liabilities and the net position. 

(e) [W]hen the entity continues to recognise all of the transferred assets, the carrying amounts of 

the transferred assets and the associated liabilities. 

(f) [W]hen the entity continues to recognise the assets to the extent of its continuing involvement 

. . . the total carrying amount of the original assets before the transfer, the carrying amount of 

the assets that the entity continues to recognise, and the carrying amount of the associated 

liabilities. 

For financial asset transfers that result in full derecognition with the entity’s continuing involvement in the 

assets, the entity must disclose information that allows users to evaluate both the nature of and the risks 

associated with the entity’s continuing involvement in derecognized financial assets. An entity is required 

to disclose information at the reporting date for each class of continuing involvement, including: 

• The carrying amounts and fair values of the assets and liabilities that represent the entity’s 

continuing involvement in the derecognized financial assets. 

• The maximum exposure to loss from the entity’s continuing involvement. 

• The undiscounted cash flows that are or may be required to repurchase derecognized financial 

assets, along with a maturity analysis of those cash flows. 

• Any gain or loss recognized at the date of the asset transfer. 


• Any income and expenses recognized in the reporting period from the entity’s continuing 

involvement in the derecognized financial assets. 

• Qualitative information to support and explain the quantitative disclosures. 

The disclosures would be applied prospectively for annual periods beginning on or after July 1, 2011. 

The most notable difference in the disclosure requirements accepted by the IASB and those required 

by U.S. GAAP relates to the servicing of assets and liabilities. Because IAS 39 does not contain specific 

guidance on the subsequent accounting for these items, the IASB agreed that rather than include 

disclosure requirements for the servicing of assets and liabilities within the scope of IFRS 7, any disclosures 

should be regarded as part of a broader consideration of the topic. 

IASB Pending Projects 

Financial Instruments — Amortized Cost and Impairment 

In 2009, the IASB issued an ED on its amortized cost and impairment proposals. The comment period for 

those proposals closed in June 2010, and the IASB is currently weighing the concerns expressed through 

comment letter responses as well as the input provided by the Expert Advisory Panel (EAP), a group 

supporting the IASB by providing insight on operational challenges preparers may face in implementing 

the proposals. The Board is involved in subsequent deliberations based on the feedback it has received; 

it has suggested a potential for reexposure early in the first quarter of 2011. A summary of the original 

proposals and the subsequent decisions to date are detailed below. 

ED Proposals 

The IASB proposals introduce an expected-loss model for amortized cost measurement and income 

recognition, a significant change from the incurred-loss model for impairments currently used in practice. 

At the initial recognition of a financial instrument measured at amortized cost, an entity would determine 

its estimate of expected future cash flows incorporating the potential for credit losses, i.e., nonpayment 

by the borrower, using a probability-weighted expected outcome approach. Instead of recognizing credit 

losses if and when they are incurred (as under the current accounting model), the future credit losses 

expected on the date the asset is initially recognized would be incorporated into the measurement of the 

asset by recognizing a lower EIR over the life of the instrument than the contractual EIR. The effective 

return on the instrument would incorporate any fees, points, or transaction costs; any premium or 

discount on the acquisition; and the initial estimate of expected credit losses. An allowance will be built 

over the life of the instrument calculated as the periodic portion of expected credit losses included as part 

of the EIR. 

If the losses expected after the asset was initially recognized are different in timing and/or amount than 

they were when the asset was first recognized, an adjustment to the carrying amount of the financial 

asset is made immediately and is recognized directly in profit and loss. If the timing and amount of actual 

losses equal those that were originally expected when the asset was initially recognized, the allowance 

built up over the life of the instrument will equal the actual losses suffered as a result of nonpayment by 

the borrower. An entity would establish a policy for identifying uncollectible amounts and determining 

when the allowance account would be used for writing off the asset. 


The following table summarizes the key concepts of the IASB proposals. 

Initial Recognition: 

Estimate Future 

Credit Losses 

Over Life of Asset 

• Asset by asset or 

groups of similar 

assets. 

• Estimate expected 

cash flows taking 

into account 

expected future 

credit losses over the 

life of the asset or 

assets. 

• Probability-weighted 

possible outcome 

approach even if 

most likely outcome 

is full repayment. 

• No up-front loss is 

recognized — credit 

loss estimate impacts 

net interest revenue 

over time. 

Example Illustration 

Net Interest 

Revenue Adjusted 

for Margin to 

Reflect Initial 

Estimate of Future 

Credit Losses 

• Margin for initially 

expected credit 

losses is deducted 

from gross interest 

revenue in each 

period. 

• Determined through 

application of the EIR 

method. 

• Practical expedients 

permitted if they 

meet certain criteria. 

Allowance for 

Future Credit 

Losses Built Up 

Over Time 

• The margin for 

initially expected 

credit losses that 

is deducted from 

gross interest 

revenue in each 

period is set aside 

to gradually build 

up an allowance 

for expected future 

credit losses. 

• Applies even if no 

actual losses have yet 

been incurred. 

• Does not require 

objective evidence 

of impairment or 

loss events to have 

occurred. 

Ongoing 

Adjustments to 

Estimates of 

Future Credit 

Losses 

• In each period, 

the entity must 

reassess the asset’s 

expected cash flows, 

taking into account 

expected future cash 

flows. 

• Any changes in credit 

loss expectations 

— both favorable 

and unfavorable 

— are recognized 

immediately on a 

discounted cash flow 

basis as a gain or loss 

in earnings. 

• Discount revised 

expected future cash 

flows at the asset’s 

EIR. 

In the following example, a fairly simple transaction is used to illustrate these concepts. Assume that Bank 

A has a cost of funding of four percent and originates a loan of $100,000, and the loan terms require 

a single payment from the borrower of $110,000 one year from origination (a coupon interest rate of 

10 percent). On the basis of its experience with similar loan originations, Bank A anticipates there is a 

97.5 percent likelihood that the borrower will fulfill its obligation to pay the loan in full. However, there 

is a 2.5 percent likelihood the borrower will default on the loan and not be able to make the scheduled 

repayment. Using the probability-weighted outcomes, the lender anticipates receiving $107,250 

($110,000 at 97.5 percent confidence and $0 at 2.5 percent confidence). 

In this example, the EIR used to accrue net interest revenue is 7.25 percent (the one-year anticipated 

return on the $100,000 loan) compared with the contractual EIR under an incurred-loss model of 10 

percent. The IASB’s view is that recognizing the 10 percent interest over the life of the loan would 

overstate net interest revenue because Bank A only anticipates receiving a net 7.25 percent return when 

taking into account expected credit losses. In other words, recognizing the 10 percent interest frontloads 

interest revenue early in the life of the loan until expected future losses are incurred. 

Instead, under the IASB’s proposal, the expected future losses are set aside throughout the life of the loan 

as a loan loss allowance. Proponents of the IASB’s approach believe this better reflects how entities make 

lending decisions and price loans, including compensation for additional assumption of credit risk. 


So what do the accounting entries look like for this transaction? 

Loan Origination 

Loan receivable $ 100,000 

Debit Credit 

Cash $ 100,000 

Interest Recognition (shown as one annual entry rather than 12 separate monthly entries) 

Interest receivable $ 10,000 

Debit Credit 

Interest revenue $ 7,250 

Loan receivable — allowance for credit losses 2,750 

At the end of the year, three scenarios are possible: 

• Scenario 1, actual credit losses match the initial expectation of credit loss estimates — Assume 

that the actual credit losses are $2,750 and no gain or loss is recognized at the end of the year. 

Bank A would write off the part of the interest receivable that is uncollectible ($2,750) against 

the allowance account. 

• Scenario 2, actual credit losses are zero or lower than the initial expectation of credit loss 

estimates — Assume that the entire $110,000 is collected, contrary to the initial expectation of 

$107,250. In this case, Bank A would record a gain of $2,750 at the end of the year to reverse 

the allowance for credit losses of $2,750 established throughout the year. 

• Scenario 3, actual credit losses exceed the initial expectation of credit loss estimates — Assume 

that the borrower defaults on the loan and Bank A receives no repayment of the $100,000 loan 

receivable. In this instance, Bank A would change its estimate of future expected cash flows and 

would adjust the carrying amount of the loan receivable to $0 by recognizing an impairment loss 

on the $100,000 plus the accrued interest revenue of $7,250. 

The proposal also details specific presentation requirements for profit and loss as follows: 

Statement of Profit and Loss Presentation Scenario 1 Scenario 2 Scenario 3 

Gross interest revenue $ 10,000 $ 10,000 $ 10,000 

Periodic portion of initial estimated credit losses (2,750) (2,750) (2,750) 

Net interest revenue 7,250 7,250 7,250 

Interest expense 4,000 4,000 4,000 

Net interest margin 3 3,250 3,250 3,250 

Changes in estimates of expected credit losses — 2,750 (107,250) 

Net income $ 3,250 $ 6,000 $ (104,000) 

3 Net interest margin is not specifically required in the proposal. However, most financial institutions will include it in a separate line because it is a key 

performance indicator for those entities. 


Operational Concerns of Proposals 

The EAP and many comment letter respondents expressed significant concerns regarding the 

operationality of the expected cash flow impairment model. The application of this model to an open 

portfolio of assets, into and out of which assets may be continuously moving, is not thought to be 

possible. The problem focuses on (1) isolating the initial assets and the estimate of expected credit losses 

for those assets and (2) identifying subsequent revisions to expected future cash flows attributable to the 

original assets compared with those assets subsequently added to the portfolio. Another concern that 

many preparers expressed is the technological challenge, since the information necessary to develop the 

expectation of future credit losses is typically housed in a separate credit-risk system other than that used 

for financial reporting. A potential solution suggested by the EAP is to “decouple” or separately source the 

information from the accounting and risk management systems. This could be accomplished by adjusting 

the interest revenue amounts calculated from the accounting system with an allocation method for 

expected credit losses derived from information in the risk management system. In practice, entities will 

have many financial assets subject to impairment with different contractual terms and differing degrees of 

credit risk; performing an expected-loss assessment at initial recognition thereafter will prove challenging. 

Proposed Disclosures 

The ED also proposes several disclosure requirements, including grouping of disclosures into classes of 

instruments and vintage information such as year of origination and scheduled maturity. The disclosures 

also require an entity to provide a reconciliation of changes in the allowance account, a description of 

its write-off policy, and information about the use of estimates and changes in estimates — including 

inputs and assumptions used in the determination of expected credit losses and explanations for amounts 

recognized in profit and loss resulting from changes in estimates of credit losses. In addition, if an entity 

uses stress testing as part of its risk management process, information about such stress tests should be 

disclosed. Detailed information regarding nonperforming assets is also required as part of the proposal. 

Several comment letter respondents to the ED expressed concern over certain aspects of the proposed 

disclosures, including sensitivity analysis, loss triangles, stress testing, nonperforming assets, and vintage 

information. Those concerns include the operational burden on preparers created by requiring such 

disclosures and questions on how useful the information will be to investors. 


The proposed amendments will be included as part of IFRS 9 with early application provisions available. 

However, if an entity elects to early adopt any part of the IFRS 9 amendments, it must also apply any 

other provisions of IFRS 9 that are already finalized and not currently applied. According to the proposed 

transition requirements, for those items recognized before the effective date, an entity must adjust the 

EIR to approximate the rate that would have been applied had the standard been in effect at that time. 

However, comment letter respondents have expressed concern about the proposed transition provision 

and its application to existing financial assets measured at amortized cost. Their concern focuses on (1) the 

ability to go back to a historical point in time to develop estimates that were not originally made, solely 

to recalculate an EIR for application purposes, and (2) whether this recalculation provides information 

relevant to investors. 

Subsequent Deliberations 

The IASB is currently redeliberating the proposals in light of the feedback received. To date, the Board 

has tentatively agreed to continue pursuing an expected-loss model that will use all available information 

in the estimate to forecast losses over the life of the financial asset. The Board has also reaffirmed its 

previous decision to spread those initial loss estimates over the life of the instrument. Perhaps most 


important, the Board has tentatively agreed to permit the use of a “decoupled EIR” (separately sourcing 

the EIR and expected credit losses) to address the operational concerns expressed by comment letter 

respondents and the EAP. 

The Board has also begun discussions on a “good book/bad book” approach; items within the “good 

book” would follow the model described above. However, once an item has been transferred to the “bad 

book,” the expected loss would be fully recognized immediately. The Board has tentatively decided not to 

specifically require when items should be transferred to the “bad book” (e.g., more than 90 days past due) 

but instead to have entities follow their process for managing credit risk and nonperforming assets. 

The Board has also begun discussions on a “good book/bad book” approach; items within the “good 

book” would follow the model described above. However, once an item has been transferred to the “bad 

book,” the expected loss would be fully recognized immediately. The most significant sources of tension in 

these discussions will most likely be (1) how the IASB defines the criteria for items being transferred to the 

bad book and (2) whether that approach either follows an entity’s risk management process or specific 

“brightlines” are mandated (e.g., more than 90 days outstanding). 

Financial Instruments — Hedge Accounting 

IASB constituents have criticized the hedging model in IAS 39 for being overly complex and rules-based. 

They requested that any revisions to the hedge accounting model (1) be more principles based and (2) 

make hedge accounting more available when the activity is consistent with risk management activities. 

They also expressed support for a complete reconsideration of hedge accounting rather than a piecemeal 

alteration of the current model to address certain application issues. 

IASB outreach with financial statement users has consistently raised comments about the hedge 

accounting model not being appropriately linked to an entity’s risk management processes. As a result, 

a continuing theme throughout this project has been better integration of risk management and hedge 

accounting. 

Discussions on phase one of the hedge accounting project have been ongoing throughout 2010, and 

the IASB completed those discussions at the end of October. An ED was issued in early December with a 

90-day comment period. 

Scope 

The Board agreed to permit a designation of risk components approach to hedge accounting for both 

financial and nonfinancial instruments in which the risk component can be separately identifiable and 

reliably measurable. For example, an entity can apply hedge accounting to only the interest rate risk 

of a variable rate corporate bond denominated in a foreign currency and not to all associated risks 

(e.g., interest rate risk, credit risk, and foreign exchange risk). This is important because it (1) ensures a 

greater alignment of the derivative used to hedge the specific risk with the hedge designation for hedge 

accounting and (2) limits the “noise” associated with hedge ineffectiveness. 

IFRS 9 eliminated the concept of bifurcating embedded derivatives in hybrid financial assets. The IASB 

considered how this may affect hedge accounting since those derivatives embedded in hybrid financial 

assets would no longer be considered separate financial instruments. The Board decided not to permit 

those derivatives to be eligible hedging instruments. 


Fair Value Hedge Accounting 

The Board agreed that the ineffective portion of the fair value hedging relationship will be recognized 

in profit or loss while the effective portion would be recognized in OCI (offsetting to zero). However, 

contrary to IAS 39, they agreed on the creation of a “separate account” valuation allowance within either 

assets or liabilities rather than remeasuring the hedged item for changes in value associated with the 

hedged risk. 

Hedge Effectiveness Assessment 

The Board also agreed to replace the quantitative-based hedge effectiveness measurement (the arbitrary 

80 percent to 125 percent effectiveness test) to initially qualify and continually retain hedge accounting. 

Instead, the Board tentatively agreed on a framework for hedge effectiveness qualification that requires (1) 

the hedging relationship to be unbiased and to minimize ineffectiveness (i.e., not intentionally overhedged 

or underhedged) and (2) the level of offset to be more than accidental. 

The Board is also permitting voluntary rebalancing of the hedging relationship to retain hedge accounting 

under the hedge effectiveness criteria as long as the risk management strategy has not changed. 

Hedging of Groups of Items 

The Board has also decided to permit hedge accounting of net positions for fair value hedges and certain 

cash flow hedges. Cash flow hedges would be restricted from net position hedging if the highly probable 

forecast transaction would affect profit or loss in different periods. 

Time Value of Options 

If an entity designates a derivative that is an option (e.g., a purchased call option or interest rate cap), 

under IAS 39, it is required to designate the hedging instrument in its entirety or just the intrinsic value 

of the option. Because the option is only regarded as offsetting the risk exposure of the hedged item 

when it is in-the-money, the designation of the option in its entirety generally results in significant hedge 

ineffectiveness due to the fair value changes of the option associated with its time value. In practice, 

therefore, entities only designate the intrinsic value of the option, which results in immediate recognition 

in profit or loss of the fair value movements associated with time value. Some regard this profit or loss 

volatility as artificial and have long sought a solution to overcome this. 

In response, the Board has agreed on an “insurance premium view” of accounting for the time value 

associated with options. Under the insurance premium view, for transaction-related hedged items (e.g., 

forecast purchase of a commodity), the cumulative change in the fair value of the option attributable to 

time value would be recognized in OCI and then recycled (i.e., a nonfinancial asset would be capitalized, 

hedged sales would be recycled into profit or loss). Likewise, for time-related hedged items (e.g., hedging 

existing commodity inventory over a specified period), the cumulative change in the fair value of the 

option attributable to time value would be recognized in OCI and amortized to profit or loss as insurance 

premiums paid on a rational basis. To avoid accounting issues associated with option terms that do not 

match the hedged items, if the actual time value is less than the time value of an option that perfectly 

matches the hedged item, the amount recognized in accumulated OCI would be determined to be the 

lower of (1) the fair value change of the actual time value and (2) the time value of the “perfect” option. 

Those amounts in OCI would also be subject to an impairment test. 


Presentation and Disclosure 

Aside from the change in presentation associated with fair value hedges described above, the Board 

has addressed two other presentation issues related to hedge accounting. The first presentation issue 

relates to applying hedge accounting to the foreign exchange risk of a firm commitment. IAS 39 currently 

allows for designation of these relationships as either a fair value hedge or a cash flow hedge because 

of the impact to both the cash flows and the fair value of the firm commitment. The Board tentatively 

agreed to retain this designation choice on a hedge-by-hedge relationship. The second presentation issue 

relates to applying cash flow hedge accounting to a forecast transaction, which results in recognition of 

a nonfinancial item. IAS 39 currently permits an accounting policy election of either adjusting the initial 

basis of the recognized nonfinancial item for gains and losses to date on the hedging instrument or 

retaining those gains or losses in OCI. To address the lack of comparability resulting from the accounting 

policy choice, the Board has proposed requiring adjustment of the initial basis when the non-financial 

forecast transaction occurs by directly adjusting accumulated OCI (thereby not affecting the performance 

statement upon adjustment). 

The Board has also developed a disclosure framework for hedging activities. The proposed disclosures 

include requiring a tabular format presentation of information by type of hedge and by risk category 

for the effects of hedge accounting on the statement of financial position, the statement of profit and 

loss, the statement of OCI, and the cash flow hedge reserve. Information about hedge accounting 

not captured in the financial statements will also be required, including the risk management strategy, 

quantitative information of risk exposures and how the risk is hedged (including the monetary amount of 

quantity, e.g., barrels, tons), exposure for that risk, the monetary amount of quantity of the risk exposure 

being hedged, and how hedging has changed the exposure. 


Section 4 

Asset Management Sector Supplement 

Asset Management Accounting Update 

This section discusses recent accounting developments that are of specific interest to the asset 

management sector. It should be read in conjunction with Sections 1 and 2, which address other key 

accounting considerations that apply more broadly to financial services entities and may be relevant to the 

asset management sector. 


On January 21, 2010, the FASB issued ASU 2010-06. The ASU amends ASC 820 to add new requirements 

for (1) disclosures about transfers into and out of Levels 1 and 2 and (2) separate disclosures about 

purchases, sales, issuances, and settlements related to Level 3 measurements. It also clarifies existing fair 

value disclosures about the level of disaggregation and about inputs and valuation techniques used to 

measure fair value. 

Although it had been proposed in the ED, entities are not required to provide sensitivity disclosures under 

the ASU. However, the FASB and IASB are jointly considering whether to require sensitivity disclosures as 

part of their convergence project on fair value measurement. The FASB issued an ED on the topic in June 

2010, and a final standard is expected in the first quarter of 2011. 

The guidance in ASU 2010-06 is effective for the first reporting period (including interim periods) 

beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of 

purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years 

beginning after December 15, 2010, and for interim periods within those fiscal years. In the period of 

initial adoption, entities will not be required to provide the amended disclosures for any previous periods 

presented for comparative purposes. However, those disclosures are required for interim and year-end 

periods ending after initial adoption. Early adoption is permitted. 

See Section 1 for further details. 

ASC 810 

In January 2010, the FASB issued ASU 2010-10. The ASU defers the application of Statement 167 for a 

reporting enterprise’s interest in certain entities that have all the attributes of an investment company or 

for which it is industry practice to apply measurement principles for financial reporting that are consistent 

with those followed by investment companies. The deferral also applies to a reporting entity’s interest in 

an entity that is required to comply or operate in accordance with requirements similar to those in Rule 

2a-7 of the Investment Company Act of 1940 (the “Investment Company Act”) for registered money 

market funds. The deferral does not apply to situations in which a reporting entity has the explicit or 

implicit obligation to fund losses of an entity that could potentially be significant to the entity and to 

interests in securitization entities, asset-backed financing entities, or entities formerly considered QSPEs. 

Any entities qualifying for the deferral will continue to be assessed under the overall guidance on the 

consolidation of VIEs in ASC 810-10 before it was updated by Statement 167. 

The ASU’s amendments also clarify that for entities that do not qualify for the deferral, related parties 

should be considered when an entity evaluates whether the fee of a decision maker or service provider 

represents a variable interest. In addition, the requirements for evaluating whether such fee is a variable 

interest are modified to clarify the FASB’s intention that a quantitative calculation should not be the sole 

basis for this evaluation. 

The ASU is effective for all reporting periods beginning after November 15, 2009. 

Section 4: Asset Management Sector Supplement 77

As a result of the deferral, asset managers must consider their involvement with securitization vehicles 

(e.g., CDOs), asset-backed funding facilities, or certain entities for which they have provided a guarantee 

and that are not similar in nature to money market funds. They must then evaluate whether they have 

the power to direct the economic activities of those structures and whether the fee received from those 

structures could be potentially significant to the VIE. If so, the asset manager would most likely be 

considered the primary beneficiary and will be required to consolidate the VIE. 

TPA on Alternative Investments 

The AICPA Investment Companies Expert Panel and Staff issued guidance on December 23, 2009, in 

the form of Technical Practice Aids (TPAs) to assist entities in valuing their investments in nonregistered 

investment companies, such as hedge funds, private equity funds, real estate funds, commodity funds, 

and common/collective trust funds (individually and collectively, alternative investments). The guidance 

is intended to help entities value such investments in accordance with the provisions of ASC 820 as 

amended by ASU 2009-12. ASU 2009-12 allows investors to value alternative investments by using the 

NAV per share calculated by the manager of the investment company or its administrator as a practical 

expedient to determining an independent fair value. ASU 2009-12 limited when the practical expedient 

could be used and provided guidance on applying the fair value hierarchy that was part of Statement 

157 (now encompassed in ASC 820). The TPA is set out in AICPA Technical Questions and Answers (TIS) 

Sections 2220.18–.27, which apply to investments that are required to be measured and reported at 

fair value and are within the scope of ASC 820-10-15-4 and 15-5. The TPA’s guidance in those sections 

consists of the following topics: 

• Applicability of Practical Expedient (TIS Section 2220.18). 

• Unit of Account (TIS Section 2220.19). 

• Determining Whether NAV Is Calculated Consistent With FASB ASC 946, Financial Services — 

Investment Companies (TIS Section 2220.20). 

• Determining Whether an Adjustment to NAV Is Necessary (TIS Section 2220.21). 

• Adjusting NAV When It Is Not as of the Reporting Entity’s Measurement Date (TIS Section 

2220.22). 

• Adjusting NAV When It Is Not Calculated Consistent With FASB ASC 946 (TIS Section 2220.23). 

• Disclosures — Ability to Redeem Versus Actual Redemption Request (TIS Section 2220.24). 

• Impact of “Near Term” on Classification Within the Fair Value Hierarchy (TIS Section 2220.25). 

• Categorization of Investments for Disclosure Purposes (TIS Section 2220.26). 

• Determining Fair Value of Investments When the Practical Expedient Is Not Used or Is Not 

Available (TIS Section 2220.27). 

Although the TPA is nonauthoritative, entities may still find it helpful in applying and adopting the existing 

accounting pronouncements issued by the FASB. 


Using NAV as a Practical Expedient 

ASU 2009-12 notes that NAV may only be used as a practical expedient of fair value if: 

• The investee has calculated NAV in a manner consistent with ASC 946, which contains guidance 

on how investment companies calculate NAV under U.S. GAAP. 

• The NAV has been calculated as of the investor’s measurement date (e.g., date of the financial 

statements). 

• It is not probable as of the measurement date that the reporting entity will sell a portion of an 

investment at an amount different from NAV. 

If any of these criteria are not met, the entity should consider an adjustment to the NAV. 

The TPA suggests that the reporting entity’s management should independently evaluate the fair value 

measurement process used by the alternative investment manager in calculating NAV to determine 

consistency with ASC 946. Many investors already consider this to be part of their initial and ongoing 

due diligence process. The TPA focuses on the need to evaluate the adequacy of the financial reporting 

processes and controls used to estimate fair value that exist at the underlying fund manager (or its 

administrator) and suggests that investors should understand and evaluate changes in such processes 

and controls. It provides specific points that investors may want to address and document, including the 

following: 

• The portion of the underlying securities held by the investee fund that are traded on active 

markets. 

• The professional reputation and standing of the investee fund’s auditor and any qualification of 

its report. 

• Whether there is a history of significant adjustments to the NAV reported by the investee fund 

manager as a result of the annual financial statement audit or otherwise. 

• Findings in the investee fund’s adviser or administrator’s SAS 70 report, if any. 

• Whether NAV has been appropriately adjusted for items such as carried interest and clawbacks. 

• Comparison of historical realizations to last reported fair value. 

The TPA notes that an investor in a fund of funds should evaluate the controls and processes at the fund 

of funds manager and would not necessarily be required to look through to the processes and controls at 

the underlying fund interests of the fund of funds. 

Considerations When the NAV Is Not Used 

When the practical expedient is not available or when an entity elects not to use it, an entity will need to 

estimate the fair value of the alternative investment. When the NAV is of a date other than the entity’s 

measurement date, the TPA suggests that an entity perform a rollforward from the date of the NAV that 

takes into account capital activity and changes in valuations. 

The TPA notes that, in some instances, an entity may be able to obtain sufficient information from the 

alternative investment manager to estimate an adjustment to a provided NAV that was not in accordance 

with U.S. GAAP. However, depending on the availability of valuation information, transparency, and 


unique characteristics of the alternative investments, the task of determining the fair value of such 

investments may pose challenges, and significant effort will most likely be required in the estimation of fair 

value for these alternative investments that do not have readily determinable fair values. 

The TPA offers examples of inputs that might be used in an entity’s estimation and adjustment of fair 

values and reminds entities that methods used to measure the fair value of an investment should reflect 

assumptions that a market participant would use to value the asset on the basis of the best information 

available. Example inputs include NAV; observed transactions, including level and volume of activity; 

expected future cash flows; features of the alternative investment and its investment performance 

relative to benchmarks/indices; and other comparable investments. Each individual feature would need 

to be assessed for its potential impact on fair value. The AICPA’s inclusion of these considerations in 

the TPA suggests that demand for an alternative investment may be higher (or lower) than comparable 

investments because certain elements are more (or less) attractive than those on comparable investments 

and therefore an investor would be willing to pay more (or less) than the NAV of such an alternative 

investment. The TPA notes that after evaluating these elements, an entity may conclude that the NAV is 

the best measure of fair value. 

In evaluating features, entities should, according to the TPA, distinguish between (1) initial due diligence 

features, which are features inherent to the specific alternative investment (such as restrictions on 

redemption outlined in the offering memorandum) that were contemplated (and accepted) when the 

initial investment was made and (2) ongoing monitoring features, which are features related to activities 

after the initial investment, including the triggering of key provisions in the governing documents. 

The presence of initial due diligence features by themselves may not require an adjustment to NAV 

because they (1) may represent common features of similar investment products offered in the 

marketplace, (2) have been accepted by investors at the initial acquisition as not being a significant 

deterrent or adjustment factor to initial NAV, or (3) both. For example, the presence of gate provisions, 

or the contractually allowable use by the alternative investment manager of side pockets, may not have 

any impact on NAV over the holding period unless those provisions are exercised by the manager. The 

reporting entity should also consider key initial due diligence features in the alternative investment relative 

to those prevailing in the current market; terms that are more restrictive than those observed in the 

marketplace for similar alternative investments may suggest a discount and vice versa. 

In contrast, ongoing monitoring features, which cause a significant change in conditions relative to those 

on the initial due diligence date, are more likely to result in fair value adjustments. To illustrate, the actual 

imposition of a gate provision may be indicative of liquidity concerns with the underlying investments and 

also result in liquidity concerns with respect to alternative investment as a whole because a gate provision 

is likely to increase the timing of redemption receipt. Such features are those a market participant is likely 

to consider and may result in a discount to the investment value. The magnitude of the discount is a 

matter of professional judgment. In general, an investor should evaluate how changes from the initial due 

diligence features may affect an alternative investment’s fair value when an entity is not using or is not 

able to use NAV as a practical expedient. 

Disclosures 

ASU 2009-12 suggests that if the reporting entity does not have the ability to redeem its investment at 

NAV (e.g., it has the contractual and practical ability to redeem) in the “near term” on the measurement 

date, the investment should be classified as Level 3 in the fair value hierarchy. The TPA clarifies two points: 

1. For an investment in a redeemable alternative investment to meet the criteria for Level 2 

classification in the fair value hierarchy, the reporting entity need not have submitted a previous 

redemption request effective as of the measurement date. 


2. A redemption period of 90 days or less would generally be considered “near term,” although 

other factors may be relevant and should be considered. 

The fair value hierarchy is required to be shown for major categories of investments, and investors have 

questioned how that should be shown for alternative investments. The TPA clarifies that major categories 

disclosed for alternative investments should be tailored to the specific nature and risks of the reporting 

entity’s alternative investments. In the absence of a diversified portfolio of alternative investments (e.g., 

hedge, private equity, venture, real estate), the reporting entity may consider more specific categories 

(e.g., industry, geography, strategy) that allow readers to further understand the risks and exposures 

associated with the alternative investment categories. ASU 2010-06, which was issued in January 2010 

(see discussion above), changed the terminology from “major categories” to “classes” and provides crossreferences 

to guidance in ASC 820-10 on how to present appropriate classes for fair value measurement 

disclosures. 

In general, entities should remember that changes in how an entity values its alternative investments 

may, if significant, trigger additional disclosure requirements. Additional guidance on this subject may be 

forthcoming from the AICPA. 

TPA on Business Combinations 

In December 2009, the AICPA issued TIS Section 6910.33 on business combinations. The TPA notes that 

when a transaction or other event meets the definition of a “business combination,” ASC 805-10-50 

requires, among other things (1) the “identification of the acquiree,” (2) the recognition and measurement 

of “identifiable assets acquired and liabilities assumed, at the acquisition date, generally at their fair 

values,” and (3) “[d]isclosure, by the acquirer, of information that enables users of its financial statements 

to evaluate the nature and financial effect of a business combination that occurs during the current 

reporting period.” 

The TPA describes some of the financial reporting, disclosure, regulatory, and tax guidance that should be 

considered in preparing financial statements of investment companies involved in a business combination: 

When investment companies engage in a business combination, shares of one company typically are 

exchanged for substantially all the shares or assets of another company (or companies). Most mergers 

of registered investment companies are structured as tax-free reorganizations. Following a business 

combination, portfolios of investment companies are often realigned, subject to tax limitations, to 

fit the objectives, strategies, and goals of the surviving company. Typically, shares of the acquiring 

fund are issued at an exchange ratio determined on the acquisition date, essentially equivalent to the 

acquiring fund’s [NAV] per share divided by the NAV per share of the fund being acquired, both as 

calculated on the acquisition date. Adjusting the carrying amounts of assets and liabilities is usually 

unnecessary because virtually all assets of the combining investment companies (investments) are 

stated at fair value, in accordance with [ASC 820] and liabilities are generally short-term so that their 

carrying values approximate their fair values. [Footnote omitted] However, conforming adjustments 

may be necessary when funds have different valuation policies (for example, valuing securities at the 

bid price versus the mean of the bid and asked price) in order to ensure that the exchange ratio is 

equitable to shareholders of both funds. 

Only one of the combining companies can be the legal survivor. In certain instances, it may not be 

clear which of the two funds constitutes the acquirer for financial reporting purposes. Although the 

legal survivor would normally be considered the acquirer, continuity and dominance in one or more of 

the following areas might lead to a determination that the fund legally dissolved should be considered 

the acquirer for financial reporting purposes: 

• Portfolio management 

• Portfolio composition 


• Investment objectives, policies, and restrictions 

• Expense structures and expense ratios 

• Asset size 

A registration statement on Form N-14 is often filed in connection with a merger of management 

investment companies registered under the Investment Company Act of 1940 (the Act), or of business 

development companies as defined by the Act. Form N-14 is a proxy statement in that it solicits a vote 

from the (legally) acquired fund’s shareholders to approve the transaction, and a prospectus, in that it 

registers the (legally) acquiring fund’s shares that will be issued in the transaction. Form N-14 frequently 

requires the inclusion of pro forma financial statements reflecting the effect of the merger. . . . 

Merger-related expenses (mainly legal, audit, proxy solicitation, and mailing costs) are addressed in the 

plan of reorganization and are often paid by the fund incurring the expense, although the adviser may 

waive or reimburse certain merger-related expenses. Numerous factors and circumstances should be 

considered in determining which entity bears merger-related expenses. 

In accordance with FASB ASC 805-10-25-23, acquisition related costs are accounted for as expenses 

in the periods in which the costs are incurred and the services are received, except that costs to issue 

equity securities are recognized in accordance with other applicable U.S. generally accepted accounting 

principles. 

If the combination is a taxable reorganization, the fair value of the assets acquired on the date of the 

combination becomes the assets’ new cost basis. For financial reporting purposes, assets acquired 

in a tax-free reorganization may be accounted for in the same manner as a taxable reorganization. 

However, investment companies carry substantially all their assets at fair value as an ongoing reporting 

practice and cost basis is principally used and presented solely for purposes of determining realized 

and unrealized gain and loss. Accordingly, an investment company, which is an acquirer in a business 

combination structured as a tax-free exchange of shares, may make an accounting policy election to 

carry forward the historical cost basis of the acquiree’s investment securities for purposes of measuring 

realized and unrealized gain or loss for statement of operations presentation in order to more closely 

align the subsequent reporting of realized gains by the combined entity with tax-basis gains distributable 

to shareholders. The basis for such policy election should be disclosed in the notes to the financial 

statements, if material. 

Instructions to Forms N-1A and N-2 state that, for registered investment companies, costs of purchases 

and proceeds from sales of portfolio securities that occurred in the effort to realign a combined fund’s 

portfolio after a merger should be excluded in the portfolio turnover calculation. The amount of 

excluded purchases and sales should be disclosed in a note. [Footnote omitted] 

FASB ASC 805-10-50-1 states that disclosures are required when business combinations occur during 

the reporting period or after the reporting date but before the financial statements are issued. 

In accordance with FASB ASC 805-10-50, 805-20-50, and 805-30-50, disclosures for all business 

combinations should include a summary of the essential elements of the combination; that is, the 

name and description of the acquiree, the acquisition date, the percentage of voting equity interests 

acquired, the primary reasons for the combination and the manner in which control was obtained, 

the nature of the principal assets acquired, the number and fair value of shares issued by the acquiring 

company, and the exchange ratio. In addition, public business enterprises are required to disclose 

supplemental pro forma information consisting of the revenue and earnings of the combined entity for 

the current reporting period as though the acquisition date for all business combinations had been as 

of the beginning of the acquirer’s annual reporting period. 

Public business enterprises are also required to report, if practicable, the amounts of revenue and 

earnings of the acquiree since the acquisition date included in the combined entity’s income statement 

for the reporting period. In many cases, investments acquired are absorbed into and managed as an 

integrated portfolio by an investment company upon completion of an acquisition; therefore, providing 

this information will not be practicable. That fact, along with an explanation of the circumstances, 

should be disclosed. 


Because of the importance of investment company taxation to amounts distributable to shareholders, 

certain additional disclosures are recommended for combinations of investment companies, including 

the tax status and attributes of the merger. Additionally, if the merger is a tax-free exchange, separate 

disclosure of the amount of unrealized appreciation or depreciation and the amount of undistributed 

investment company income of the acquiree at the date of acquisition, if significant, may provide 

meaningful information about amounts transferred from the acquiree, which may be distributable by 

the combined fund in future periods. 

The TPA contains financial statements and disclosures that illustrate a tax-free business combination of an 

investment company as well as illustrative footnotes that are unique to a business combination. 

Registration of Fund Advisers With the SEC 

Private fund advisers, including managers of hedge funds and private equity funds, with assets under 

management in the United States of more than $150 million will be required to register with the SEC 

under the Investment Advisers Act of 1940 (“the Adviser’s Act”) per the requirements of the Dodd-Frank 

Act, by July 21, 2011. Exemptions from registration will be allowed for venture capital advisers, small 

business investment advisers, family office advisers (on the basis of exemptions currently provided by the 

SEC), and small foreign private fund advisers that meet certain requirements, including having fewer than 

15 investors in the United States and less than $25 million in assets under management attributable to 

U.S. investors. Subject to SEC rules, registered private fund advisers must maintain and file reports related 

to the assessment of systemic risk for each private fund. 

Rule 203-1 of the Advisers Act requires investment advisers to register with the SEC by filing Form ADV, 

which is divided into two parts. Part 1 requires general information about the adviser, including business 

practices, ownership and control, regulatory and disciplinary history, relevant state registrations, access 

to client funds, and balance sheet information. Part 2 is the written disclosure statement (brochure) and 

requires detailed information about the adviser, such as affiliations and conflicts, types of services offered 

and fees charged, types of clients advised and investment strategies used, educational and business 

backgrounds of investment professionals, disciplinary histories, investment advisory activities, brokerage 

practices and allocation, trade aggregation and allocation, code of ethics and personal trading, and proxy 

voting. 

The complexity of the adviser’s organization as well as the resources devoted to the effort will determine 

the duration of the registration process. Time frames from start to finish can range from three to nine 

months. Before registration, companies should develop and adopt a compliance program that meets 

applicable requirements under the Advisers Act and train employees on relevant requirements. 

Registered investment advisers are required to report information on their funds, including the following: 

• AUM and use of leverage, including off-balance-sheet leverage. 

• Counterparty credit risk exposure. 

• Trading and investment positions. 

• Valuation policies and practices of the fund. 

• Types of assets held. 

• Side arrangements or side letters. 

• Trading practices. 


• Other information that the SEC, in consultation with the FSOC, deems appropriate for 

the protection of investors or for the assessment of systemic risk, which may include the 

establishment of different reporting requirements for different classes of fund advisers, based on 

the type or size of private fund being advised. 

Item 18: Financial Information, of Form ADV requires disclosure of certain financial information about an 

adviser when it is material to clients. Specifically, an adviser that requires prepayment of fees of more than 

$1,200 must provide its clients with an audited balance sheet showing the adviser’s assets and liabilities at 

the end of its most recent fiscal year. Therefore, an adviser considering first-time registration with the SEC 

should determine whether an audit of its balance sheet is required. 

See Section 1 for further details. 

Usage of Derivative Instruments 

In March 2010, the SEC staff indicated in a press release that it would be “conducting a review to 

evaluate the use of derivatives by mutual funds, exchange-traded funds and other investment companies, 

[to determine if any] additional protections are necessary for those funds under the Investment Company 

Act of 1940.” The goal of the review is to ensure that regulatory protections keep up with the increasing 

usage and complexity of derivative instruments. 

According to the press release, “the staff generally intends to explore issues related to the use of 

derivatives by funds.” Such issues include, among other things, whether: 

• current market practices involving derivatives are consistent with the leverage, concentration 

and diversification provisions of the Investment Company Act 

• funds that rely substantially upon derivatives, particularly those that seek to provide leveraged 

returns, maintain and implement adequate risk management and other procedures in light of 

the nature and volume of the fund’s derivatives transactions 

• fund boards of directors are providing appropriate oversight of the use of derivatives by funds 

• existing rules sufficiently address matters such as the proper procedure for a fund’s pricing and 

liquidity determinations regarding its derivatives holdings 

• existing prospectus disclosures adequately address the particular risks created by derivatives 

• funds’ derivative activities should be subject to special reporting requirements 

The staff also will seek to determine what, if any, changes in Commission rules or guidance may be 

warranted. 

On July 30, 2010, the SEC’s Division of Investment Management sent a letter to the Investment Company 

Institute about its observations on current derivatives-related disclosures by investment companies in 

registration statements and shareholder reports. According to the letter, the SEC primarily observed 

that certain “funds provide generic disclosures about derivatives that . . . may be of limited usefulness 

for investors in evaluating the anticipated investment operations of the fund, including how the fund’s 

investment adviser actually intends to manage the fund’s portfolio and the consequent risks. [Footnote 

omitted] The generic disclosures vary from highly abbreviated disclosures that briefly identify a variety of 

derivative products or strategies, to lengthy, often highly technical, disclosures that detail a wide variety of 

potential derivative transactions without explaining the relevance to the fund’s investment operations.” 


The SEC also noted that some funds could improve their disclosures under ASC 815’s requirement to 

provide qualitative information about their objectives and strategies for using derivative instruments by 

addressing the effect of using derivatives during the reporting period. While many funds state that they 

“may” engage in certain types of derivative transactions, they do not provide qualitative information 

about how the funds achieved their objectives and strategies by using derivative instruments during the 

reporting period. The financial statements and accompanying notes should inform shareholders about 

how a fund actually used derivatives during the period to meet its objectives and strategies. 

Collective Unit Trusts 

In a speech in April 2010, a director of the SEC’s Division of Investment Management indicated that the 

SEC is investigating whether there may be a need for regulatory recommendations regarding the use of 

collective investment trust platforms, which has increased in recent years. Collective investment trusts 

are, according to the speech, “regulated by the banking agencies, and may rely on an exclusion from 

registration under the Investment Company Act. The premise underlying this exclusion is that banks 

exercise full investment authority over the pooled assets, among other things. As collective investment 

trusts become more popular and their structures more varied, the Division is looking at whether, under 

certain conditions, this exemption is properly relied upon and consistent with the Act and whether it 

denies investors appropriate protections.” The SEC will consider whether banks are “operating merely in 

custodial or similar capacity while providing a place for an adviser to simply place pension plan assets of 

its clients.” 

Target Date Fund Disclosures 

In June 2010, the SEC proposed amendments to Rule 482 of the Securities Act and Rule 34b-1 of the 

Investment Company Act that, if adopted, would require: 

• A “target date retirement fund that includes the target date in its name to disclose the fund’s 

asset allocation at the target date immediately adjacent to the first use of the fund’s name in 

marketing materials.” 

• Marketing materials for target date retirement funds that would include “a table, chart, or graph 

depicting the fund’s asset allocation over time, together with a statement that would highlight 

the fund’s final asset allocation.” 

• A statement in marketing materials “to the effect that a target date retirement fund should not 

be selected based solely on age or retirement date, is not a guaranteed investment, and the 

stated asset allocations may be subject to change.” 

The SEC is also proposing amendments to Rule 156 of the Securities Act that, if adopted, “would 

provide additional guidance regarding statements in marketing materials for target date retirement funds 

and other investment companies that could be misleading. The amendments are intended to provide 

enhanced information to investors concerning target date retirement funds and reduce the potential for 

investors to be confused or misled regarding these and other investment companies.” 


Joint Project on Financial Statement Presentation 

On July 1, 2010, the FASB and IASB posted to their Web sites a staff draft of an ED on financial statement 

presentation. The staff draft reflects the boards’ tentative decisions through April 2010; however, work on 

the project is continuing and the proposal is subject to change before the boards issue an ED for public 

comment. As part of the project, the boards are also conducting outreach activities focused primarily on 

“(1) the perceived benefits and costs of the proposals and (2) the implications of the proposals for financial 

reporting by financial services entities.” Although the boards have not formally requested comments 

on the staff draft, they welcome input from interested parties. Before publishing an ED, the boards will 

consider whether to revise any of their decisions on the basis of the input they receive. 

In the staff draft, the boards take a fresh look at the manner in which financial information is presented 

in an entity’s statement of financial position, statement of comprehensive income, and statement of cash 

flows. The intent of the proposal is to create a single model for presenting financial statements that will 

enhance the usefulness of the information provided in the financial statements and increase comparability 

and consistency within and across entities. The proposed guidance would apply to most entities. Currently, 

there is limited guidance on how entities should present information in their financial statements. 

As a result, alternative presentations have developed, creating inconsistencies among similar entities 

and difficulties in understanding relationships within an entity’s financial statements. Accordingly, the 

introduction to the staff draft identifies the following “core principles” of financial statement presentation 

to “enhance the understandability” of an entity’s financial information: 

• Cohesiveness: “the relationship between items in the financial statements is clear and that an 

entity’s financial statements complement each other as much as possible.” 

• Disaggregation: “separating resources by the activity in which they are used and by their 

economic characteristics.” 

Joint Project on Consolidation 

Under IFRS, the accounting for consolidation is currently addressed by IAS 27, a control-based model, and 

by SIC-12, a risks-and-rewards-based model. Under U.S. GAAP, consolidation is addressed by ASC 810-10 

for both the variable interest model and the voting interest model. The objective of the joint project is to 

develop a single comprehensive consolidation model that would apply to all entities, including both voting 

and VIEs, and to require enhanced disclosures about consolidated and unconsolidated entities. 

In their meeting on May 19, 2010, the boards tentatively decided that when preparing consolidated 

financial statements, the parent of an investment company (if it is not an investment company itself) is 

prohibited from retaining the fair value accounting that is applied by an investment company subsidiary. 

(This reverses the FASB’s previous tentative decision to allow the parent of an investment company 

subsidiary to retain the fair value measurement basis applied by the investment company.) Accordingly, a 

parent of an investment company would be required to consolidate all entities that it controls, including 

those that are controlled by an investment company subsidiary, unless that parent is an investment 

company itself. 

The boards also tentatively decided that if a reporting entity has an interest in an investment company 

that it accounts for by using the equity method, it should retain the fair value accounting that is applied by 

an investment company subsidiary when applying the equity method accounting. 


As part of their joint deliberations, the boards also reached the following additional tentative decisions: 

• The guidance in ASC 946 would be used as the basis for developing the attributes of an 

investment company. 

• An investment company is an entity that meets all of the following criteria: 

Disclosure 

1. Express business purpose. The express business purpose of an investment company is investing 

for current income, capital appreciation, or both. 

2. Exit strategy. The entity has identified potential exit strategies and a defined time (or range of 

dates) at which it expects to exit the investment. 

3. Investment activity. Substantially all of the entity’s activities are investment activities carried 

out for the purposes of generating current income, capital appreciation, or both. The entity 

and its affiliates shall not obtain benefits from its investees that would be unavailable to other 

investors or unrelated parties of the investee. 

4. Unit ownership. Ownership in the entity is represented by units of investments. 

5. Pooling of funds. The funds of the entity’s owners are pooled to avail owners of professional 

investment management. 

6. Fair value. All of the investments are managed, and their performance evaluated (both internally 

and externally), on a fair value basis. 

7. Reporting entity. The entity must be a reporting entity. 

8. Debt. Any providers of debt to the investees of the entity shall not have direct recourse to any 

of the entity’s other investees. 

The Boards asked the staff[s] to clarify some aspects of the criteria in drafting. In particular, the Boards 

asked that it be clear that significant third-party investment is required for an entity to be an investment 

company. 

An investment company should disclose the following: 

• Whether it has provided any financial or other support to any of its controlled investees that it 

was not previously contractually required to provide. 

• The nature and extent of any significant restrictions on the ability of its controlled investees to 

transfer funds to the investment company. 

Further, the boards tentatively agreed that an investment company should not be required to present 

summarized financial information for controlled investments. 

Transition 

The FASB tentatively decided that an entity currently applying the investment company guidance in ASC 

946 should discontinue the application of this guidance if it no longer qualifies as an investment company. 

This change should be applied prospectively from the date the revised consolidation requirements are first 

applied. For those investees that are required to be consolidated because an entity no longer qualifies as 

an investment company, the entity should apply the same transition guidance for all other entities that will 

be required to be consolidated as a result of the revised consolidation requirements. 


Both the FASB and the IASB tentatively decided that an entity that was not previously considered an 

investment company, but meets the new definition of an investment company, should recognize its 

investments in entities that it controls at fair value on the date that it first applies the revised consolidation 

requirements and should make an adjustment to retained earnings. 

In the second quarter of 2011, the boards expect to issue an ED. The FASB hopes to issue a final 

standard in the fourth quarter of 2011. 

Joint Project on Financial Instruments 

The FASB and IASB have agreed on a set of core principles for financial instruments accounting. The 

core principles are designed to achieve comparability and transparency as well as consistency of credit 

impairment models and reduced complexity of financial instruments accounting. The boards agreed that: 

• Any requirements issued by the boards should enhance comparability of information for the 

benefit of investors. 

• Financial reporting of financial instruments should provide information that helps investors assess 

the risks associated with those instruments. 

• For financial instruments that have highly variable cash flows or that are part of a trading 

operation, prominent and timely information about the fair values of those instruments is 

important. 

• For financial instruments with principal amounts that are held for collection or payment of 

contractual cash flows rather than for sale or settlement with a third party, information about 

both amortized cost and fair value is relevant to investors. 

• The classification and measurement requirements should be less complex to implement than are 

the current requirements. 

• Impairment principles should be consistent for all instruments held for collection of their 

contractual cash flows. 

On May 26, 2010, the FASB issued a proposed ASU, Accounting for Financial Instruments and Revisions 

to the Accounting for Derivative Instruments and Hedging Activities. The proposed ASU contains a 

comprehensive new model of accounting for financial assets and financial liabilities that addresses (1) 

recognition and measurement, (2) impairment, and (3) hedge accounting. The proposal would significantly 

affect the accounting for a broad range of financial instruments, including investments in debt and equity 

securities, nonmarketable equity investments, loans, loan commitments, deposit liabilities, trade payables, 

trade receivables, derivative financial instruments, and debt liabilities. Comments on the proposed ASU 

were due by September 30, 2010. 

Roundtable discussions are ongoing in the fourth quarter of 2010, and a final standard is expected to be 

issued by June 30, 2011. The effective date of the final standard has not yet been determined. 

Three items in the proposed ASU could significantly affect the asset management industry: 

• Transaction fees and costs would be “(1) expensed immediately for financial instruments 

measured at fair value with all changes in fair value recognized in net income and (2) deferred 

and amortized as an adjustment of the yield for financial instruments measured at fair value 

with qualifying changes in fair value recognized in OCI.” This could affect income statement 


presentation, in particular for investment companies that currently report transaction costs within 

net income in the “realized and unrealized gain or loss from investments” category and not as 

part of “investment income and expenses.” Certain ratios, such as expense ratios, would be 

affected as a result. 

• Money markets funds that may have measured financial instruments at amortized cost under Rule 

2a-7 of the Investment Company Act would be required to instead measure them at fair value if 

certain conditions are met. 

• The proposed ASU would result in a significant number of financial liabilities being measured 

at fair value when such financial liabilities were previously measured at cost or subject to the 

embedded derivative bifurcation requirements in ASC 815. 

Joint Project on Financial Instruments With Characteristics of Equity 

The FASB’s and IASB’s project on financial instruments with characteristics of equity is intended to improve 

and simplify, through development of a new classification approach, the financial reporting of financial 

instruments considered to have one or more characteristics of equity. The boards have decided to propose 

that entities provide disclosures about the nature and terms of the instruments, including information 

about settlement alternatives, in addition to the disclosures currently required by U.S. GAAP and IFRSs. 

The project may affect the balance sheet classification for redeemable interests in investment companies. 

Joint Project on Revenue Recognition 

On June 24, 2010, the FASB and IASB issued an ED, Revenue From Contracts With Customers. The ED 

gives entities a single comprehensive model to use in reporting information about the amount and timing 

of revenue resulting from contracts to provide goods or services to customers. It applies to any entity 

that enters into contracts to provide goods or services, and would supersede most of the current revenue 

recognition guidance. Comments on the ED were due by October 22, 2010. 

In applying the ED’s provisions to contracts within its scope, an entity would: 

(a) identify the contract(s) with a customer; 

(b) identify the separate performance obligations in the contract; 

(c) determine the transaction price; 

(d) allocate the transaction price to the separate performance obligations; and 

(e) recognize revenue when the entity satisfies each performance obligation. 

The ED also requires entities to disclose both quantitative and qualitative information about the amount, 

timing, and uncertainty of revenue (and related cash flows) from contracts with customers and the 

judgment, and changes in judgment, they exercised in applying the ED’s provisions. The disclosures 

required by the ED would significantly expand those currently required by existing revenue standards and 

would include: 

• Information about the nature of customer contracts and the related accounting policies. 

• A disaggregation of reported revenue (in categories that best depict how the amount, timing, 

and uncertainty of revenues and cash flows are affected by economic characteristics). 

• A reconciliation of the beginning and ending contract assets and liabilities. 


• Information about performance obligations (types of goods/services, payment terms, timings, 

etc.). 

• Information about onerous contracts, including the extent and amount of such contracts and the 

reasons they became onerous. 

• A description of the principal judgments used in accounting for contracts with customers. 

• Information about the methods, inputs, and assumptions used in determining and allocating the 

transaction prices. 

Roundtable discussions are continuing in the fourth quarter of 2010, and a final standard is expected to 

be issued in the second quarter of 2011. Although the ED’s impact on asset management companies is 

not yet clear, there may be implications related to the recognition and disclosure requirements for certain 

management and performance fee arrangements. 

See Section 3 for further details on FASB and IASB projects. 

Other Developments 

In January 2010, the CFA Institute released revised global investment performance standards (the “GIPS 

standards”). The significant changes to the GIPS standards include the requirement for entities (1) to 

value assets by using a fair value method when no market value is available, (2) to present the standard 

deviation (widely accepted as a common measure of portfolio risk) of the monthly returns of both the 

composite and the benchmark, and (3) to disclose their verification status (i.e., whether they have been 

verified) and prescribed language describing what is and is not covered by verification. Firms that claim 

compliance with the GIPS standards have until January 1, 2011, to adhere to the new requirements, and 

early adoption is recommended. 

Regulatory Sector Supplement — Asset Management 

New Form ADV, Part 2 

On August 12, 2010, the SEC adopted changes 1 to Part 2 (formerly Part II) of Form ADV, the second 

component of the registration form and client disclosure document used by investment advisers registered 

under the Advisers Act. Part 2 of the new Form ADV (the “brochure”) requires registered advisers to 

provide most clients and prospective clients with a “brochure” containing clearer and more meaningful 

disclosure of their business practices, potential conflicts of interest, and personnel backgrounds. The new 

brochure must be presented in a narrative, “plain English” format rather than the current “check-the-box” 

format. Furthermore, advisers must provide clients with a brochure supplement that contains, among 

other things, background information on certain supervised persons providing advisory services to clients, 

including their disciplinary history, outside business activities, and compensation arrangements. 

Advisers are required to electronically file the brochures with the SEC. The most recent versions of the 

brochures will be posted on the SEC’s Web site. 

Brochures that meet the new requirements must be filed within 90 days of an adviser’s first fiscal year-end 

on or after December 31, 2010, and must be delivered to clients within 60 days of this filing; the client 

delivery requirement changes to 30 days for subsequent Form ADV filings. The new brochure requirements 

1 SEC Final Rule Release No. IA-3060, Amendments to Form ADV. 


are likely to apply to advisers registering for the first time in response to the Dodd-Frank Act, depending 

on the date of the advisers’ ADV filings. 

Narrative Brochure Written in “Plain English” 

The SEC believes that a narrative format will give advisers greater flexibility to present more meaningful, 

relevant information to investors. 2 Certain SEC commissioners have observed that for the narrative 

requirement to be effective, however, advisers will need to adopt the “spirit” of the requirement and 

move away from the standard boilerplate language often used by advisers to protect against legal liability. 3 

Toward this end, advisers must use “plain English” (e.g., short sentences, everyday words, and the active 

voice). In addition, in an effort to avoid cluttering their brochures with irrelevant disclosures or practices, 

advisers should disclose only conflicts and business practices that they have (or are reasonably likely to 

have). 

Key Changes to the Brochure’s Content 

In addition to changing the brochure’s format requirements, the SEC has included several new disclosure 

requirements in Part 2 of the new Form ADV (e.g., summary of material changes from the previous year, 

information about performance-based fees and side-by-side management) and has amended many of 

the current disclosure requirements. Part 2 is now broken down into two sections: Part 2A, referred to as 

the “firm brochure,” consists of 18 disclosure items related to the adviser’s activities as a whole; Part 2B, 

referred to as the “brochure supplement,” consists of six new disclosure items specific to the experience 

and activities of certain supervised persons 4 that provide advisory services to clients. 

Brochure Supplements 

Advisers must supply tailored brochure supplements disclosing background information about certain 

supervised persons who provide advisory services to clients. Under the previous brochure requirements, 

advisers had to disclose background information only about executives and members of investment 

committees. The SEC indicated that such disclosure was not relevant to clients, especially clients of 

larger asset management firms, who receive advisory services primarily from supervised persons who 

are not executives or members of the investment committee. Instead, advisers will be asked to disclose, 

among other things, information regarding each supervised person’s education and business experience, 

disciplinary history, other substantial investment-related activities, potential conflicts of interest, and 

additional compensation. The brochure supplements must be delivered either before or when the 

supervised person begins to provide advisory services to a client. If any other material changes occur 

during the year, the adviser is required to deliver annually an updated brochure supplement to the 

applicable clients. Although advisers are not required to file brochure supplements with the SEC, they must 

make these supplements available during an SEC inspection. 

Key Changes to Delivery Requirements 

The SEC has also changed how and when advisers distribute brochures to clients. Advisers must file their 

firm brochures electronically with the SEC as part of their initial registration and at least annually thereafter 

via the IARD. The firm brochures will be publicly available on the SEC’s Web site. An adviser’s annual filings 

2 See Section II.D.2 of SEC Proposed Rule Release No. IA-1862, Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV, April 5, 

2000. 

3 See July 21, 2010, SEC Open Meeting on the SEC’s Web site. 

4 Instruction 1 of Part 2B of Form ADV requires advisers to prepare a brochure supplement for (1) any supervised person who formulates investment 

advice for, and has direct contact with, the client and (2) any supervised person who has discretionary authority over a client’s assets, even if the 

person has no direct client contact. 


are due no later than 90 days after its fiscal year-end. In addition to filing the brochure, advisers must 

annually deliver to clients a summary of material changes to the brochure, along with an offer to provide 

the brochure and brochure supplement upon request. 

Money Market Reform 

On February 23, 2010, the SEC issued a final rule 5 on money market fund reform that amends Rules 

2a-7 and 17a-9 of the Investment Company Act. The final rule is designed to increase the protection of 

investors, improve fund operations, and enhance fund disclosures. 

More specifically, the amendments: 6 

• Tighten the risk-limiting conditions by reducing the maximum weighted-average maturity of the 

portfolio permitted for money market funds, increasing liquidity limits, and restricting the fund’s 

ability to invest in securities with lower credit ratings. 

• Require money market funds to disclose, on a monthly basis, their “shadow” floating share price, 

with a 60-day lag until this information becomes publicly available. 

• Require money market funds to report, on a monthly basis, their portfolio holdings to the SEC. 

• Permit money market funds that “break the buck” (or that are at imminent risk of doing so) to 

suspend redemptions to allow for an orderly liquidation. 

• Require fund managers to conduct periodic stress tests to assess the fund’s ability to maintain a 

stable net asset value. 

• Limit the type of collateral for repurchase agreements. 

• Increase oversight responsibility for fund advisers. 

• Require boards of directors of money market funds to designate four or more NRSROs so that the 

funds can adequately evaluate the eligibility of portfolio securities. 

The amendments became effective on May 5, 2010, with rolling effective dates for certain provisions 

through October 31, 2011. 

The Dodd-Frank Act, signed into law on July 21, 2010, has potential implications for the final rule because 

it mandates the SEC to conduct a review to assess current standards of creditworthiness. In response to 

a request from the Investment Company Institute, the SEC issued a no-action letter on August 19, 2010, 

regarding the designation of NRSROs. The no-action letter indicates that the Division of Investment 

Management would not recommend that the SEC take any enforcement action against money market 

fund boards that opt not to (1) designate four or more NRSROs, (2) disclose the NRSROs in their 

statements of additional information, or (3) both of these. 7 

7 See SEC Final Rule Release No. IA-3043, Political Contributions by Certain Investment Advisers, on the SEC’s Web site. 

5 SEC Final Rule Release No. IC-29132, Money Market Fund Reform. 

6 For more information about the reforms, see the press release on the SEC’s Web site. 


New Rules for a New Era: The SEC Adopts “Pay-to-Play” Rules 

The SEC recently adopted new and amended rules under the Advisers Act to deter investment advisers 

from engaging in “pay-to-play” practices. The rules restrict campaign contributions to politicians who may 

be in a position to (1) influence the selection of advisers to manage state and local pension funds and 

other investment plans or (2) impose new requirements. 

Direct Political Contributions 

Rule 206(4)-5 prohibits an adviser from providing advisory services for compensation to a “government 

entity” 8 for two years after the date of an impermissible political contribution 9 by the adviser or its 

“covered associates” 10 to an “official” 11 of the government entity with responsibility for, or influence 

over, the adviser’s hiring. The new rule also applies to “covered investment pools,” which include private 

investment funds and registered investment companies (but only those that are part of a state or local 

government’s investment program). 

Rule 206(4)-5(b)(1) permits de minimis contributions by covered associates. A covered associate that 

is entitled to vote for the candidate can make an aggregate campaign contribution of up to $350 per 

government official, per election; otherwise, the associate’s campaign contribution is limited to $150. 

Primary and general elections count separately. 

Indirect Political Contributions 

Rule 206(4)-5(d) prohibits advisers and covered associates from taking indirect actions that would be 

prohibited if done directly. These actions include: 

• Asking another person or group (such as a PAC) to make a contribution. 

• Soliciting or coordinating payments to a state or local political party when advisory services are 

sought. 

• Indirectly coordinating or sponsoring contributions (e.g., fund-raising events). 

Solicitation Services 

Rule 206(4)-5(a)(2)(i) prohibits advisers and covered associates from paying a third party to solicit state and 

local government clients on the adviser’s behalf unless the third party is a “regulated person.” A regulated 

person is a party who is either (1) an SEC-registered investment adviser who has made no impermissible 

contributions within the previous two years or (2) an SEC-registered broker-dealer and a member of a 

national securities association such as FINRA. 

8 A government entity is a state, political subdivision, agency, or instrumentality; a pool of assets sponsored or established by such an entity (e.g., 

defined benefit plans); an entity’s plans or programs (including 403(b), 457, and 529 plans); and officers, agents, or employees of such an entity. 

Government entities do not include the federal government, its agencies and instrumentalities, or non-U.S. governments. 

9 A contribution includes anything of value given to influence an election, pay an election debt, or fund transition or inaugural expenses. Contributions 

may include those related to federal elections if the official has influence over the adviser’s hiring as a function of his or her current office. 

10 A covered associate is (1) any general partner, managing member, executive officer, or other individual with a similar status or function; (2) any 

employee who solicits a government entity for the adviser and any person who supervises, directly or indirectly, such an employee; and (3) any 

PAC controlled by the adviser or by any of its covered associates. Soliciting means communicating with a government entity to obtain or retain an 

investment advisory relationship or to receive a related referral fee. 

11 A government official is an incumbent or candidate, if the person has (1) direct or indirect responsibility for or influence over the outcome of an 

adviser’s hiring by a government entity or (2) the authority to appoint such a person. 


Recordkeeping 

Under the amendments to Rule 204-2, advisers who provide advisory services to state and local 

governments must keep records of the following for five years: 

• The adviser’s covered associates. 

• Government clients who (1) receive direct advisory services or (2) have invested in covered 

investment pools during the past five years (starting September 13, 2010). 

• Relevant contributions made by the adviser and covered associates. 

• Regulated persons providing solicitation services. 

Compliance Dates 

Although the new and amended rules become effective on September 13, 2010, compliance with the 

new requirements is being implemented in phases. The compliance deadline for the compensation ban, 

monitoring, and client recordkeeping requirements is March 14, 2011, and advisers must comply with the 

third-party solicitor restrictions and covered investment pool requirements by September 13, 2011. 

Operational Impacts 

The new provisions will most likely necessitate changes to advisers’ policies, compliance monitoring, 

and record-keeping practices. Advisers should incorporate these changes as part of a robust compliance 

program. The following are key considerations: 

Topic Considerations 

Understanding covered 

associates 

Understanding 

government officials 

Determining candidate 

scope 

Managing the code 

of ethics or other 

compliance policies 

• Identifying the population of employees. 

• Identifying the ability to influence the adviser’s selection. 

• Identifying responsibility for the adviser’s selection. 

• Identifying in-scope federal candidates. 

• Incorporating new contribution policies, including potentially banning or imposing 

preclearance requirements. 

• Notifying covered associates of their status and receiving acknowledgments. 

• Training covered associates and others. 

Contribution monitoring • Establishing procedures and infrastructure for covered-associate self-reporting. 

• Developing a report process for adviser PAC contributions. 

• Establishing detective mechanisms for indirect, inadvertent contributions. 

Contribution tracking • Reviewing an employee’s two-year political contribution history upon hiring or 

reclassification to a covered associate (limited to six months if the employee does not 

solicit any clients after becoming a covered associate). 

• Continuing to abide by restrictions on compensated advisory services for two years 

following an impermissible contribution, even if an employee departs or ceases to be a 

covered associate within the two-year time frame. 


Topic Considerations 

Third-party solicitor 

tracking 

Understanding covered 

investment pools 

• Identifying regulated persons. 

• Identifying in-scope pooled investment vehicles. 

• Tracking evolving government investment plan/program arrangements. 

Recordkeeping • Gathering and maintaining new required documentation. 

SEC Rule 206(4)-2 — “Custody Rule” Summary 

On December 30, 2009, the SEC finalized amendments to Rule 206(4)-2 (the “Custody Rule”) under the 

Advisers Act. The Custody Rule took effect on March 12, 2010. 

The Custody Rule can affect advisers differently depending on the method (i.e., amount of discretion 

conveyed) and type of client accounts they manage. An adviser is deemed to have “custody” if (1) the 

adviser or a related person holds, directly or indirectly, client funds or securities or (2) the adviser has 

the authority to obtain possession of client funds or securities or the related person has such authority 

in connection with advisory services the adviser provides to clients. 12 If an adviser has custody of funds 

solely as a consequence of authority to make withdrawals from client accounts to pay advisory fees, it is 

exempt from the surprise examination requirements. The Custody Rule can apply in many different ways, 

depending on the type of client accounts or pooled vehicles in the adviser’s custody. Some advisers may 

only need to have their qualified custodians distribute quarterly account statements to their clients. Others 

may also need to undergo a surprise examination, receive an internal control report from their qualified 

custodian, or both. 

The staff of the SEC’s Division of Investment Management has posted numerous questions and responses 

regarding the Custody Rule on the SEC’s Web site. 13 

The AICPA Investment Companies Expert Panel also issued a FAQ document in August 2010 regarding the 

Custody Rule. 14 

12 For more information, see Deloitte’s Custody Rule Overview: Navigating the Road Ahead. 

13 See the SEC Staff Responses to Questions About the Custody Rule document on the SEC’s Web site. 

14 AICPA Investment Companies Expert Panel Report, Frequently Asked Questions Regarding the SEC’s Revised Custody Rule and Guidance for 

Accountants. 


Section 5 

Banking and Securities Sector Supplement 

Banking and Securities Accounting Update 

This section discusses recent accounting developments that are of specific interest to the banking 

and securities sector. It should be read in conjunction with Sections 1 and 2, which address other key 

accounting considerations that apply more broadly to financial services entities and may be relevant to the 

asset management sector. 

“Dear CFO” Letter on Repurchase Agreements 

In March 2010, the SEC staff issued a standard Dear CFO letter seeking more information on the 

accounting for and use of repurchase arrangements. While the letter does not replace or amend existing 

GAAP, the SEC has requested registrants to enhance disclosures about these types of transactions, 

including: 

• Any securities lending transactions that are accounted for as sales under ASC 860-10, the basis 

for that accounting, and quantification of the amount of these transactions. 

• Any other transactions involving the transfer of financial assets with an obligation to repurchase 

the transferred assets, in a manner similar to repurchase or securities lending transactions that 

would be accounted for as sales under ASC 860. 

• Any offset of financial assets and financial liabilities in the balance sheet in which a right of setoff 

(i.e., the general principle for offsetting) does not exist. 

In addition, the SEC staff is seeking to understand the timing, nature, and extent to which companies 

are using repurchase agreements accounted for as sale transactions, including any counterparty 

concentrations, the impact of repurchase agreements on key ratios or metrics, and the business purpose 

of these transactions. 

Loss-Sharing Arrangements 

LSAs are guarantees provided to financial institutions by the FDIC in connection with either (1) a 

government-facilitated acquisition of a bank or (2) a purchase of a pool of high-risk assets (either existing 

assets or assets recently purchased in a government-sponsored transaction). An LSA typically provides 

for the reimbursement of a portion of the principal losses incurred on the acquired portfolio over a fixed 

and stated time frame, generally with a “first loss threshold” to be incurred by the acquiring financial 

institution. Recent transactions have also included a clawback feature that would give the FDIC a share in 

any recoveries of loans previously covered by payments under the program. 

The FDIC uses two forms of loss sharing: one for commercial assets and one for residential mortgages. 

A typical LSA for commercial assets covers an eight-year period, with the first five years for losses and 

recoveries and the final three years for recoveries only. The FDIC will reimburse 80 percent of losses 

incurred by the acquirer on covered assets up to a stated threshold amount (generally the FDIC’s dollar 

estimate of the total projected losses on loss share assets), with the acquiring institution absorbing the 

remaining 20 percent. 

LSAs for single-family mortgages tend to run 10 years and have the same 80/20 split as commercial asset 

LSAs. The FDIC provides coverage on some second lien loans for four basic single-family mortgage loss 

events: modification, short sale, foreclosure, and charge-off. Loss coverage is also provided for loan sales, 

but such sales require prior approval by the FDIC. Recoveries on loans that experience loss events are split 

evenly between the acquirer and the FDIC. 

Section 5: Banking and Securities Sector Supplement 96

Since the inception of LSAs, the basis for sharing losses with an acquirer has undergone some change. 

Until March 26, 2010, the FDIC shared losses with an acquirer on an 80/20 basis until the losses exceeded 

an established threshold defined in the LSA, after which the basis for sharing losses shifted to 95/5. 

Sharing losses on a 95/5 basis was eliminated for all LSAs executed after March 26, 2010. 

According to the FDIC’s Web site, through May 2010, the FDIC has entered into 161 LSAs, with $173.5 

billion in assets under LSAs. 

Accounting for LSAs 

To the extent that an institution has entered into an LSA with the FDIC, the SEC staff has requested in 

comment letters that institutions consider the following when presenting the effects of the LSA in their 

financial statements: 

• On the acquisition date, the LSA should be valued and recorded separately on the face of 

the balance sheet, or grouped within other assets if not material, in accordance with the 

indemnification guidance in ASC 805. The LSA should be subsequently reduced by either the 

reimbursement of incurred losses from the guarantor or as a result of a reduction in the expected 

losses from the acquired loan portfolio. 

• An institution that has elected to account for the loan portfolio under the fair value option under 

ASC 825 may account for the LSA as a derivative instrument, which would be subject to the 

requirements of ASC 815. The LSA would be initially recognized at fair value and subsequently 

marked to fair value through earnings each reporting period, which may create volatility in 

earnings. 

• The assets covered by the LSA should be recorded in their respective balance sheet categories 

(i.e., loans, OREO, securities). It would be acceptable to have separate subheadings for “covered” 

and “noncovered” assets. 

• The allowance for loan losses should be determined without taking into account the LSA. 

• The provision for loan losses may be net of changes in amount of receivable from the LSA, with 

appropriate disclosure of the effects of the LSA on the provision. 

• Disclosures should include the assets subject to the LSA, with separate footnote disclosure about 

the special nature of the assets. Alternatively, these assets should be presented separately within 

Industry Guide 3 disclosures. Further, the nature, extent, and impact of the LSA need to be fully 

discussed in MD&A. 

The FDIC has also issued guidance on the accounting for and examiners’ considerations of LSAs. Key 

points from the FDIC’s guidance are highlighted below: 

• “LSAs are considered conditional guarantees for risk-based capital purposes due to the 

contractual conditions that acquirers must meet. Accordingly, an acquiring institution may apply 

a 20 percent risk weight to the guaranteed portion of assets subject to an LSA.” 

• In a bargain purchase, a gain is recorded in earnings, thereby resulting in an increase in both 

GAAP equity capital and regulatory capital. Under ASC 805, “an acquiring institution’s regulatory 

capital is vulnerable to retrospective adjustments made during the measurement period of up 

to one year from the acquisition date.” Accordingly, “the FDIC may not fully consider a bargain 

purchase gain as having the permanence necessary for a tier 1 capital component . . . until the 

measurement period has ended.” 


Other Considerations 

If the acquired loans are subject to accounting under ASC 310-30: 

• Subsequent decreases in expected cash flows are recorded in the income statement immediately 

through adjustment to a loss accrual or valuation allowance. 

• Subsequent increases in expected cash flows of the loans accreted over their life would decrease 

the value of the LSA. The decrease is accreted to income over the same period. 

Regulatory Sector Supplement — Banking 

Consumer Protection Update 

Regulation Z — Implementing the Truth in Lending Act and the Home Ownership and 

Equity Protection Act 

On August 16, 2010, the Board of Governors of the Federal Reserve System (the “Federal Reserve 

Board”) issued the final Regulation Z rules, which become effective on April 1, 2011. These rules are 

intended to protect mortgage borrowers from unfair practices related to payments made to compensate 

loan originators, including mortgage brokers and loan officers. 1 The rules amend Regulation Z, which 

implements the Truth in Lending Act and the Home Ownership and Equity Protection Act. Regulation Z 

was established to promote the informed use of consumer credit by consumers, and it applies to loans for 

personal, family, or household purposes. The results of the amendments include the following: 

• Currently, loan originators may receive compensation that is based not only on the loan 

amount but also on the loan terms. When the new rules take effect, a loan originator will not 

be incentivized to raise the borrowers’ loan costs by increasing the loan interest rate or points 

to earn additional compensation from the lender. Loan originators can continue to receive 

compensation that is based on a percentage of the loan amount, which is generally considered a 

common practice. 

• Through consumer testing, the Federal Reserve Board learned that borrowers are usually not 

aware of (1) the payments lenders make to loan originators and (2) the effect those payments 

may have on the borrower’s total cost. Under the new rule, consumers who pay the loan 

originator directly are prohibited from also paying the same loan originator indirectly through a 

higher interest rate, thus paying higher loan costs than they realize. 

• The rule also prevents a loan originator from steering a consumer to complete a loan that 

provides the loan originator with greater compensation than would other transactions the loan 

originator could have offered to the consumer. The loan originator must demonstrate that the 

consumer was presented with loan options that provide (1) the lowest interest rate, (2) no risky 

features, and (3) the lowest total dollar amount of origination points or fees and discount points. 

Enhanced consumer awareness is expected to allow individuals to better understand the loan options and 

the loan fees and costs charged by the lender. 

1 See the Federal Reserve Board’s August 16, 2010, press release. 


Regulation DD and Regulation E — Final Clarification of Overdraft Services 

The Federal Reserve Board clarified the December 2008 rule, effective on January 1, 2010, under 

Regulation DD (Truth in Savings Act) and the November 2009 rule, effective on July 6, 2010, under 

Regulation E (Electronic Funds Transfer Act), regarding overdraft services. 2 

Regulation DD is intended to help consumers compare deposit accounts offered by depository institutions 

through the disclosure of certain account information, such as fees, annual percentage yield, and interest 

rate. The amendments to Regulation DD include (1) a requirement that aggregate fee disclosures be 

provided on periodic consumer deposit account statements and (2) additional disclosure requirements 

for overdraft services on periodic consumer deposit account statements for disclosure of the total dollar 

amount of all fees or charges imposed on the account when there are insufficient or unavailable funds 

and the account becomes overdrawn for the month; these may include daily and sustained overdraft fees 

or charges. 

Regulation E is intended to protect individual consumers of electronic fund transfer services by establishing 

the basic rights, liabilities, and responsibilities of those consumers and of financial institutions that offer 

these services. The amendments to Regulation E are as follows: 

• Financial institutions are prohibited from assessing a fee or charge on a customer’s account for 

paying an ATM or one-time debit card transaction that overdraws from the account without 

satisfying several requirements, including (1) notifying the consumer and (2) obtaining the 

consumer’s consent to the overdraft service. 

• The prohibition of assessment of overdraft fees applies to all institutions, including those that 

have a policy and practice of declining to authorize and pay any ATM or one-time debit card 

transaction. 

Restrictions on Gift Cards and Other Prepaid Cards 

On March 23, 2010, the Federal Reserve Board published final rules to amend Regulation E. 3 The objective 

of the rules, which are intended to protect consumers of prepaid products from abusive practices involving 

gift cards, is to control fees (e.g., inactivity fees), extend expiration dates (i.e., minimum of five years), and 

require certain disclosures of terms and conditions for prepaid products such as gift certificates, store gift 

cards (i.e., closed-loop gift cards), and general-use prepared cards (i.e., open-loop cards). 

Closed-loop cards do not typically charge fees or have expiration dates. In addition, issuers of closed-loop 

cards typically do not collect information regarding the identity of the gift card purchaser or the recipient. 

The new requirements include: 

• Limits on inactivity fees — Inactivity, dormancy, or service fees cannot be imposed unless three 

conditions are met: (1) there is at least a one-year period of inactivity before imposition of the 

fee; (2) no more than one fee is charged per month; and (3) information regarding such fees 

(e.g., what the fees are, when they might occur) is provided to the cardholder. 

• Clearly marked expiration dates — The expiration dates must be clearly printed on the card. A 

gift certificate, store gift card, or general-use prepaid card may not be sold unless the expiration 

date of the funds is at least five years after the original issuance date or five years after the last 

load of funds. 

2 See the Federal Reserve Board’s May 28, 2010, press release. See also Deloitte’s June 2010 @Regulatory newsletter. 

3 See Regulation E, Docket No. R-1377. See also Deloitte’s April 2010 @Regulatory newsletter. 


• Clear and conspicuous terms — All information pertinent to the gift card must be clear and 

easy to understand. The information should be provided on the certificate or card and disclosed 

before purchase. A toll-free telephone number and a Web site, if one is maintained, should be 

displayed on the certificate or card. 

The final rule is expected to help promote greater consumer awareness regarding gift cards. 

Credit Update 

Third Stage of Implementation of the Credit Card Act (Regulation Z) 

The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (the “Credit Card Act”) became 

law on May 22, 2009. The new credit card rules are designed to (1) protect consumers from unreasonable 

fees and penalties from issuers and (2) increase the transparency of APR increases so that consumers can 

better understand the terms and conditions of their credit lines. 4 Implementation occurred in three stages. 

The first stage, which went into effect on August 20, 2009, addressed advance notice of rate increases 

and the time frame in which consumers have to make payments. The second stage, which focused on 

interest rate increases, over-the-limit transactions, and student cards, became effective on February 22, 

2010. The last stage became effective on August 22, 2010, and introduced new protections regarding 

disproportionate penalty fees incurred for minor matters (such as late payments). More specifically, the 

rule: 

• Prohibits credit card issuers from charging penalty fees that are (1) not reasonable or proportional 

or (2) greater than the associated charges. However, the rule allows the issuer to charge fees 

that represent a reasonable proportion of the costs incurred by the issuer for the violation or an 

amount that is reasonable to deter the type of violation. 

• Prohibits credit card issuers from charging inactivity fees, late payment fees greater than the 

amount past due, and multiple penalty fees for the same violation. 

• Mandates credit card issuers that increase an APR to (1) perform a review of changes to a 

consumer’s credit risk, market conditions, and other factors at least once every six months and 

(2) reduce the APR if supported by the review. The reduction of credit card rates that result from 

such a review should take place within 30 days after completion of the review. Under the rule, 

creditors are required to review accounts on which APRs have been increased since January 1, 

2009. 

Regulatory Capital 

Agencies Issue Final Rule for Regulatory Capital Standards Related to Statements 166 and 

167 

On January 21, 2010, the federal banking and thrift regulatory agencies amended their general riskbased 

and advanced risk-based capital adequacy frameworks by adopting a final rule that eliminates the 

exclusion of certain consolidated asset-backed commercial paper (CP) programs from risk-weighted assets. 

The primary objective of the rule is to better align risk-based capital requirements with the risks of certain 

exposures. As a result, the banking organizations affected by Statements 166 and 167 are generally 

subject to higher risk-based regulatory capital requirements. However, the rule provides an optional 

4 See Regulation Z, Docket No. R-1384. See also Deloitte’s March and June 2010 @Regulatory newsletters. 


transition for four quarters of the effect on risk-weighted assets and Tier 2 capital resulting from a 

banking organization’s implementation of the new GAAP. The four-quarter transition applies to VIEs that 

were used in securitization and structured finance transactions that occurred before the effective date 

of these accounting standards. The transition mechanism consists of an optional two-quarter delay in 

implementation followed by an optional two-quarter partial implementation of the effect of Statement 

167 on risk-weighted assets and the allowance for loan and lease losses includable in Tier 2 capital. The 

transition mechanism does not apply to the leverage capital ratio and does not cover loan participations. 

Statement 166 made several changes to concepts introduced in Statement 140, such as (1) elimination 

of the concept of QSPEs; (2) limiting the circumstances in which a financial asset, or portion of a financial 

asset, should be derecognized when the transferor has not transferred the entire original financial asset 

to an entity that is not consolidated with the transferor in the financial statements being presented, when 

the transferor has continuing involvement with the transferred financial asset, or both; and (3) removal 

of provisions for guaranteed mortgage securitizations to require that those securitizations be treated the 

same as any other transfer of financial assets within the scope of Statement 140. 

Statement 167 introduced additional clarifications regarding financial reporting for reporting entities 

with VIEs, such as (1) requirements for a reporting entity to perform an analysis to determine whether 

its variable interest or interests give it a controlling financial interest in a VIE, (2) ongoing reassessments 

of whether the reporting entity is the primary beneficiary of a VIE, and (3) elimination of the quantitative 

approach previously required for determining the primary beneficiary of a VIE. 

Statements 166 and 167 increased the amount of information and disclosures regarding QSPEs, transfers 

of financial assets, and VIEs. In addition, these standards were designed to align existing financial 

reporting requirements with those mandated by IFRSs. 5 

Risk Management and Governance 

Federal Banking Agencies Issue Policy Statement on Funding and Liquidity Risk 

Management 

The “Interagency Policy Statement on Funding and Liquidity Risk Management” (“policy statement”) 

was issued to provide consistent interagency expectations on sound practices for managing funding and 

liquidity risk and to ensure consistency with the “Principles for Sound Liquidity Risk Management and 

Supervision” issued by the Basel Committee on Banking Supervision (the “Basel Committee”) in 2008. 

According to the policy statement, liquidity risk is the risk that an institution’s financial condition or overall 

safety and soundness are adversely affected by an inability to meet its obligations. In drafting the policy 

statement, the regulators noted that “[d]eficiencies include insufficient holdings of liquid assets, funding 

risky or illiquid asset portfolios with potentially volatile short-term liabilities, and a lack of meaningful cash 

flow projections with liquidity contingency plans.” 

The policy statement is designed to ensure that an institution’s liquidity management processes are 

adequate to meet its daily funding needs and cover both expected and unexpected departures from 

normal operations. This includes maintaining adequate processes for identifying, measuring, monitoring, 

and controlling liquidity risk. The Federal Reserve Board’s January 21, 2010, press release notes that in 

the policy statement, the regulators outlined key elements of liquidity risk management, including the 

following: 

• Effective corporate governance consisting of oversight by the board of directors and active 

involvement by management in an institution’s control of liquidity risk. 

5 See the Federal Reserve Board’s January 21, 2010, press release. 


• Appropriate strategies, policies, procedures, and limits used to manage and mitigate liquidity 

risk. 

• Comprehensive liquidity risk measurement and monitoring systems (including assessments of 

the current and prospective cash flows or sources and uses of funds) that are commensurate 

with the complexity and business activities of the institution. 

• Active management of intraday liquidity and collateral. 

• An appropriately diverse mix of existing and potential future funding sources. 

• Adequate levels of highly liquid marketable securities free of legal, regulatory, or operational 

impediments, that can be used to meet liquidity needs in stressful situations. 

• Comprehensive contingency funding plans (CFPs) that sufficiently address potential adverse 

liquidity events and emergency cash flow requirements. 

• Internal controls and internal audit processes sufficient to determine the adequacy of the 

institution’s liquidity risk management process. 

Principles for Enhancing Corporate Governance Issued by the Basel Committee 

On March 16, 2010, the Basel Committee issued for consultation the Principles for Enhancing Corporate 

Governance, a set of 14 principles designed to improve bank corporate governance, which are 

summarized in the following table (reprinted from the principles): 

Topic Principle Summary of Principle 

Board practices 1 The board has overall responsibility for the bank, including approving and overseeing 

the implementation of the bank’s strategic objectives, risk strategy, corporate 

governance and corporate values. The board is also responsible for providing oversight 

of senior management. 

Board qualifications 2 Board members should be and remain qualified . . . for their positions. They should 

have a clear understanding of their role in corporate governance and be able to exercise 

sound and objective judgment. 

Board’s own 

practices and 

structure 

3 The board should define appropriate governance practices for its own work and have 

in place the means to ensure such practices are followed and periodically reviewed for 

improvement. 

Group structures 4 In a group structure, the board of the parent company has the overall responsibility 

for adequate corporate governance across the group and ensuring that there are 

governance policies and mechanisms appropriate to the structure, business and risks of 

the group and its entities. 

Senior management 5 Under the direction of the board, senior management should ensure that the bank’s 

activities are consistent with the business strategy, risk tolerance/appetite and policies 

approved by the board. 

Risk management 

and internal controls 

6 Banks should have an independent risk management function . . . with sufficient 

authority, stature, independence, resources and access to the board. 

7 Risks should be identified and monitored on an ongoing firm-wide and individual 

entity basis, and the sophistication of the bank’s risk management and internal control 

infrastructures should [be consistent] with any changes to the bank’s risk profile. 

8 Effective risk management requires robust internal communication within the bank 

about risk, both across the organisation and through reporting to the board and senior 

management. 

9 The board and senior management should effectively utilise the work conducted by 

internal audit functions, external auditors and internal control functions. 


Topic Principle Summary of Principle 

Compensation 10 The board should actively oversee the compensation system’s design and operation, 

and should monitor and review the compensation system to ensure that it operates as 

intended. 

Complex or opaque 

corporate structures 

Disclosure and 

transparency 

SAFE Act — Final Rule 

11 An employee’s compensation should be effectively aligned with prudent risk taking: 

compensation should be adjusted for all types of risk; compensation outcomes should 

be symmetric with risk outcomes; compensation payout schedules should be sensitive 

to the time horizon of risks. 

12 The board and senior management should know and understand the bank’s 

operational structure and the risks that it poses. 

13 Where a bank operates through special-purpose or related structures . . . that impede 

transparency or do not meet international banking standards, its board and senior 

management should understand the purpose, structure and unique risks of these 

operations. 

14 The governance of the bank should be adequately transparent to its shareholders, 

depositors, other relevant stakeholders and market participants. 

Beginning in 2011, the Secure and Fair Enforcement for Mortgage Licensing Act (the “SAFE Act”) requires 

residential mortgage loan originators who are employees of agency-regulated institutions to be registered 

with the Nationwide Mortgage Licensing System and Registry (the “Registry”). The SAFE Act requires that 

each residential mortgage loan originator obtain a unique identifier from the Registry that will remain with 

that residential mortgage loan originator, regardless of changes in employment. Registered mortgage loan 

originators and agency-regulated institutions must provide these unique identifiers to consumers so that 

consumers can get background information about the originator if they wish. 

Agency-regulated institutions 6 are also required to mandate their employees who are mortgage loan 

originators to (1) comply with the requirements of this rule and (2) implement written policies and 

procedures to ensure compliance with the registration requirements. 

Amendments to Regulation SHO 

In February 2010, the SEC adopted Rule 201 of Regulation SHO (also known as the “alternative uptick 

rule”). 7 The objective of the rule is to restrict short selling on a given stock that is experiencing significant 

downturn in the market and to promote market stability and investor confidence. The rule only applies to 

the short selling of securities (both OTC and exchange-listed) that have declined in price by 10 percent or 

more from the previous market closing price. 

Under the rule, a “circuit breaker” will be triggered when a stock price declines 10 percent or more from 

the previous day’s closing price. The restriction may also be in effect on the following trading day. Short 

selling will only be permitted at prices at or above the national best bid for such securities. The objective is 

to allow long sellers to stand in front of short sellers in an effort to alleviate rapid downward pressure on 

the stock. 

6 The Federal Register notice explains that agency-regulated institutions are national and state banks, savings associations, and their applicable 

subsidiaries; credit unions; Farm Credit System institutions; branches and agencies of foreign banks; and certain other foreign entities. 

7 SEC Final Rule Release No. 34-61595, Amendments to Regulation SHO. 


Trading centers will be responsible for establishing, maintaining, and enforcing written policies and 

procedures that are reasonably designed to prevent the execution or display of a short sale in violation of 

the rule. A broker-dealer’s written procedures should, at a minimum, include procedures to monitor, in 

real time, the national best bid price to ensure that any short sale orders submitted to a trading center are 

in compliance with the rule’s requirements. 

The rule became effective on May 10, 2010, with compliance required by November 10, 2010. 

FINRA Rule 4110 — Capital Compliance 

FINRA Rule 4110 8 became effective on February 8, 2010. The main objectives of the rule are to support 

Rule 15c3-1 of the Exchange Act and to identify and monitor the financial and operational condition of 

broker-dealers facing financial difficulty. Because this rule is based largely on former NASD and NYSE rules 

(with some additional enhancements), it mainly affects previous NASD-only members. 

Rule 4110 is divided into five main sections: 

1. FINRA Rule 4110(a) — Authority to Increase Capital Compliance 

Under this subsection, FINRA has the authority to require a broker-dealer to increase its net capital as 

needed to protect the investing public. Increased net capital requirements could include additional 

“haircuts” on certain positions (i.e., the percentage by which an asset’s market value is reduced in the 

calculation of a broker-dealer’s capital requirement) or requirements that a firm treat certain assets 

as nonallowable in performing its net capital computation (in accordance with Rule 15c3-1). The 

requirements do not apply to introducing (nonclearing) broker-dealers. Also, once FINRA has informed 

a firm that its net capital requirements have increased, the firm has the right to request an expedited 

hearing. FINRA expects to exercise this authority only in limited circumstances. 

2. FINRA Rule 4110(b)(1) — Suspension of Business Operations 

This portion of the rule is based on former NASD Rule 3130(e) and requires any firm that is not in 

compliance with Rule 15c3-1 to suspend business operations. 

3. FINRA Rule 4110(c) — Withdrawal of Equity Capital 

Under this portion of the rule, no member firm may withdraw equity capital for one year from the date 

it was contributed, unless FINRA gives the firm written permission to do so. In addition, although Rule 

4110(c)(2) states that “members are not precluded from withdrawing profits earned,” restrictions are 

placed on the size and frequency of these withdrawals. Moreover, dividend payments or like distributions, 

as well as unsecured loans or advances to any affiliated person or entity in which the total net withdrawals 

exceed 10 percent of the firm’s excess net capital within a 35-day period, are not permitted without 

FINRA’s prior written approval. Again, this provision does not apply to introducing brokers. 

8 For more information, see FINRA’s Regulatory Notice 09-71, Financial Responsibility, issued in December 2009. 


4. FINRA Rule 4110(d)(1)(A) — Sale-and-Leaseback Transactions, Factoring, Financing, 

Loans, and Similar Arrangements 

This portion of the rule is based on former NYSE Rule 328(a) and requires that member firms obtain 

prior written approval from FINRA before entering into a sale-and-leaseback arrangement with any of 

their assets or a financing or factoring arrangement with any unsecured accounts receivable that would 

increase tentative net capital by 10 percent or more. This section also stipulates that no member may 

enter into an arrangement to sell or factor customer debit balances, regardless of the amount, without 

prior written approval from FINRA. 

5. FINRA Rule 4110(e) — Subordinated Loans, Notes Collateralized by Securities, and 

Capital Borrowings 

FINRA Rule 4110(e) is partly based on former NYSE Rule 420. Rule 4110(e)(1) implements Appendix D of 

Rule 15c3-1, which requires that all subordinated loans be approved by the examining authority before 

becoming effective. Rule 4110(e)(2) requires that the loan agreement have specific provisions, including a 

minimum duration of 12 months. 

Master and Sub-Account Guidance 

In April 2010, FINRA issued guidance on master and sub-account arrangements. 9 To comply with FINRA 

rules and federal securities laws, firms may be required to recognize certain sub-accounts as separate 

customers. 

Determination of how an account should be classified depends on the beneficial owners and the nature 

of the account. One beneficial owner may maintain multiple sub-accounts to facilitate various trading 

strategies. If an investment adviser or introducing broker has a master account that maintains multiple 

sub-accounts and identifies the different beneficial owners, those accounts must be treated as separate 

customer accounts. 

There are circumstances (e.g., with bona fide investment advisers and omnibus clearing arrangements) in 

which the broker-dealer would not be privy to the identity of the beneficial owners. In these instances, 

FINRA generally allows the broker-dealer to rely on the information supplied to it to determine (1) the 

appropriate treatment of the master and sub-accounts and (2) whether there is more than one beneficial 

owner. 

If the broker-dealer is aware (or has reason to believe) that sub-accounts have different beneficial owners 

but does not know the owners’ identities, the broker-dealer must investigate the beneficial ownership of 

each account. Some bases for inquiry into the beneficial ownership of sub-accounts include: 

• Sub-accounts receive separate reports from the broker-dealer. 

• Sub-accounts are treated separately for tax purposes or other reporting. 

• The commission charges for an individual sub-account are incurred separately and are based on 

the activity only of that particular sub-account. 

• Numerous sub-accounts are maintained for one master account. 

Although this list is not all-inclusive, it contains items that might raise a “red flag” that certain 

sub-accounts may have different beneficial owners. Once the broker-dealer identifies the beneficial 

owners of the sub-accounts, it must treat the sub-accounts as separate customer accounts. 

9 For more information, see FINRA’s Regulatory Notice 10-18, Master Accounts and Sub-Accounts, issued in April 2010. 


Regulatory Sector Supplement — Securities 

Effect of Custody Rule on Broker-Dealers 

On December 30, 2009, the SEC adopted amendments 10 to the custody requirements of Rule 206(4)-2 

under the Investment Advisers Act (the “Custody Rule”). This regulation applies when the assets 

of advisory clients are in the custody of an adviser or related broker-dealer rather than held by an 

independent qualified custodian. The objective of these amendments was to increase the protection 

of customers whose securities and investments are in the custody of registered investment advisers by 

focusing on internal control risks associated with affiliated custody, which may be greater than those 

associated with independent custody. 

The Custody Rule applies to SEC registered investment advisers that have advisory client funds or securities 

in their custody. Custody is defined as holding client funds or securities, directly or indirectly, or having 

any authority or ability to obtain possession of client funds or securities. An adviser is also considered to 

have custody if a related person meets these requirements. The rule defines a related person as a person 

directly or indirectly controlling or controlled by the adviser and any person under common control with 

the adviser. 

The Custody Rule will affect any broker-dealer that either is a registered investment adviser or is 

considered to be a related person and serves as a qualified custodian for the registered investment adviser. 

The main effects on such a broker-dealer include: 

• Surprise custody examinations. 

• Internal control report. 

• Quarterly account statements. 

Broker-dealers that are registered investment advisers or are acting as qualified custodians for related 

investments are subject to surprise examinations by an independent certified public accounting firm that 

is registered with the PCAOB. 11 The accountant’s procedures should include confirmation of the client’s 

funds and securities with both the qualified custodian and the client on a sample basis. 

In addition, broker-dealers must provide any related advisers an internal control report related to custodial 

services. This report must: 

• Be obtained annually. 

• Include an opinion from an independent certified public accounting firm that is registered with 

the PCAOB regarding whether: 

o Controls have been placed in operations as of a specific date. 

o The controls are suitably designed. 

o The controls meet the control objectives specified by the SEC. 

o The operation of the controls was sufficiently effective. 

10 SEC Final Rule Release No. IA-2968, Custody of Funds or Securities of Clients by Investment Advisers. 

11 The SEC issued a “no-action” letter on October 12, 2010, which provided guidance on compliance with the Annual Audit Provision of the Custody 

Rule in situations in which the public accountant is registered with the PCAOB but does not perform public-company audits and therefore is not 

subject to regular PCAOB inspections. 


The independent accountant is also required to verify that the funds and securities are reconciled to a 

custodian other than the adviser or its related persons (e.g., Depository Trust Corporation). 

The internal control report must be maintained in the investment adviser’s records for five years from the 

end of the fiscal year in which the report is finalized. 

Broker-dealers acting as qualified custodians for registered investment advisers must send account 

statements to the clients at least quarterly. The registered investment adviser is required to perform 

“due inquiry” and obtain a reasonable belief that the account statements are being sent by the qualified 

custodian. This due inquiry may include obtaining a copy of a customer statement that was sent to a 

particular customer. 

Registered advisers that are also acting as introducing brokers, or that have related parties acting 

as introducing brokers for their clients, should also consider the following (as noted in the SEC staff 

responses to questions about the Custody Rule): 

• Introducing brokers that are dually registered and that have the ability to receive cash or 

securities are subject to the internal control report requirement. 

• If the introducing broker is an affiliate of the adviser and has the ability to receive cash or 

securities, it is considered a qualified custodian and is subject to the internal control report 

requirement. The adviser is then subject to the surprise examination requirement. 

• Additional monitoring should be performed to assess whether the introducing broker has 

the ability to move funds at the clearing broker on behalf of the adviser’s clients; if so, the 

introducing broker may be subject to the internal control report requirement. 

The SEC is reviewing proposals of enhancements to the oversight of broker-dealer custody of customer 

assets, so additional custody rules on this topic may be proposed. 


Section 6 

Insurance Sector Supplement 

Insurance Accounting Update 

This section discusses recent accounting developments that are of specific interest to insurance 

companies. It should be read in conjunction with Sections 1 and 2, which address other key accounting 

considerations that have broader applicability to financial services entities and may also be relevant to the 

insurance sector. 

FASB Issues Discussion Paper on Insurance Contracts 

In August 2010, the FASB issued a DP, Preliminary Views on Insurance Contracts. The DP gives constituents 

the opportunity to comment on an insurance accounting model proposed by the IASB in its ED, Insurance 

Contracts, that, if adopted in the United States, would result in sweeping changes to the existing U.S. 

model. In addition, the DP summarizes the ED’s key provisions, indicates the FASB’s preliminary views, and 

includes an appendix with a table comparing current U.S. GAAP with the (1) ED’s proposed model and (2) 

FASB’s preliminary views. 

Although the FASB and IASB have expressed a desire to develop high-quality, compatible insurance 

accounting standards and have undertaken this project as a joint project, insurance accounting is not 

one of the projects addressed in the Memorandum of Understanding between the two boards, and 

there is no specific timeline for issuing a converged standard (although the IASB has stated its intent to 

issue a final revised version of IFRS 4 in the second quarter of 2011). Moreover, the FASB’s preliminary 

views differ from the views expressed in the ED in a number of important respects. Accordingly, the FASB 

chose to issue a DP instead of an ED to solicit input “on the advantages and disadvantages of pursuing a 

comprehensive reconsideration of insurance accounting versus making targeted improvements to current 

U.S. GAAP.” The DP does not incorporate the ED but refers to it extensively. 

Scope 

Both the FASB and IASB agreed that an insurance contract is defined as a “contract under which one 

party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to 

compensate the policyholder if a specified uncertain future event (the insured event) adversely affects 

the policyholder.” Thus, the application of insurance accounting does not depend on whether the entity 

writing the contract is an insurance company. 

The FASB did not agree with the IASB’s belief that financial instruments with discretionary participation 

features should be within the ED’s scope and questioned whether employer-provided health insurance 

(from the perspective of the employer) “should be excluded from the scope of the proposed guidance for 

U.S. GAAP.” 

The reasons cited in the FASB’s DP for the FASB’s preliminary conclusion that financial instruments with 

discretionary participation features should be excluded from the project’s scope include: 

• They do not transfer significant risk to the insurer and therefore do not meet the definition 

of an insurance contract. Applying insurance accounting to such contracts creates additional 

complexities, such as a need to separate these contracts from other investment contracts and to 

identify a separate principle for contract boundary. 

• The model may end up becoming an industry-specific model, since insurance companies have 

significant volume in these non-insurance-type arrangements. 

• Other financial institutions account for these contracts as financial instruments, which may lead 

to comparability issues. 

Section 6: Insurance Sector Supplement 108

The DP does not specify whether employer-provided health insurance should be included within its scope 

but requests feedback from constituents on this matter. It observes that providers of such insurance may 

receive premium payments through salary deductions and indicates that some believe such arrangements 

should be accounted for as insurance and others believe they are employee compensation expense. The 

DP also noted stakeholder uncertainty regarding possible effects of the recent health care reform law. 

Measurement Models 

According to the FASB’s preliminary views, entities would use a measurement model consisting of a 

single composite margin that defers profit at inception and implicitly reflects risk and uncertainty in the 

fulfillment cash flows. The Board believes that this approach is preferable to the IASB’s model, in which 

explicit risk adjustment and residual margins are used. Under both views, losses at inception (i.e., “onerous 

contracts”) would be recognized immediately in earnings. The DP refers to these measurement models as 

the single (i.e., “composite”) and two-margin approaches. 

Unless the contract is onerous, no measurement differences exist at inception because, under both 

approaches, the residual margin and composite margin are calibrated to the consideration received or 

receivable from the policyholder to avoid day 1 gains. However, day 2 and beyond would yield differences 

in measurement. For contracts not qualifying for the IASB’s modified approach (long-duration contracts), 

the IASB risk adjustment margin is remeasured in each reporting period, with changes recognized in 

earnings, and the residual margin (which is fixed at inception) is recognized systematically over the 

coverage period. In contrast, under the FASB’s approach, the composite margin is not discounted; it is 

fixed at inception and recognized in earnings over the coverage and claims handling period. Amortization 

of the composite margin is based on the ratio of premiums and claims cash flows allocated and paid 

to date to those ultimately expected. In addition, unlike the two-margin approach, in which interest is 

accreted on the risk and residual margins, the composite margin approach would not accrete interest. 

Measurement under the IASB’s modified approach for short-duration contracts would also differ from that 

under the FASB’s approach. These differences are discussed in greater detail below. 

Acquisition Costs 

The FASB and IASB agree that incremental acquisition costs (i.e., “those costs that would not have been 

incurred if the insurer had not issued that particular contract”) identified at the individual contract level 

would be included in the unbiased probability-weighted net fulfillment cash flows (“net cash flows”) 

and would reduce the profit within the residual margin (or composite margin). They further agree that 

acquisition costs that are not incremental would be expensed as incurred. 

However, the DP observes that differences may arise between the types of acquisition costs that may be 

included in net cash flows under the proposed building-blocks approach and those that could be deferred 

under U.S. GAAP under the recent final consensus reached by the EITF on Issue 09-G. Issue 09-G aligns 

the accounting for acquisition costs with the accounting for loan origination costs. Thus, Issue 09-G 

indicates that only the following costs may be deferred and only as they relate to successful contracts: 

(1) incremental direct costs and (2) the portion of an employee’s total compensation and payroll-related 

fringe benefits directly related to time spent on successful contract acquisition activities. In addition, Issue 

09-G specifies that direct-response advertising costs may be included in acquisition costs to the extent 

that they meet the capitalization criteria in ASC 340. 

The ED differs from Issue 09-G regarding employee costs. Specifically, the ED allows an entity to include 

commissions paid to employees for policy issuances as acquisition costs in net cash flows. Issue 09-G, 

however, treats commissions paid to employees for successful policy issuances as part of the total 

compensation subject to allocation on the basis of time spent on contract acquisition activities. In 

addition, under the ED, all advertising costs are expensed. 


Modified Approach for Short-Duration Contracts 

The ED requires a modified approach for short-duration contracts. This approach applies to contracts 

for which (1) the period of coverage “is approximately one year or less” and (2) the “contract does not 

contain embedded options or other derivatives that significantly affect the variability of cash flows, after 

unbundling any embedded derivatives.” 

The ED distinguishes between a pre-claims liability and a pre-claims obligation. Under the modified 

approach, the insurer recognizes a pre-claims liability representing its stand-ready obligation to pay valid 

claims (the pre-claims liability) as well as a claims liability for valid claims for insured events that have 

already occurred, including those that are incurred but not reported (the post-claims liability). In the ED, 

this pre-claims liability is defined as “the preclaims obligation less the expected present value of future 

premiums, if any, that are within the boundary of the existing contract.” The pre-claims obligation is 

measured at inception as the amount of premium received and the present value of future premium 

cash flows net of incremental acquisition costs, and is subsequently allocated to earnings over the 

coverage period in a systematic way. Thus, the pre-claims liability is the amount of premium received net 

of incremental acquisition costs as well as allocated premiums. Further, the ED requires that a current 

discount rate be used to accrete interest on the carrying amount of the preclaims liability. 

Like all other insurance liabilities, the postclaims liability is measured as the present value of fulfillment 

cash flows. For contracts accounted for under the modified approach, an insurer would separately present 

premium revenue, claims and expenses incurred, and amortization of incremental acquisition costs in the 

performance statement. 

While certain FASB board members believe that a modified approach should apply to some insurance 

contracts, the FASB has not concluded on the extent to which, or conditions in which, it would apply. In 

addition, the FASB does not express any preliminary views on this subject in the DP and asks respondents 

for their thoughts on this matter. 

Transition 

The ED indicates that at transition, insurers would need to restate their ending insurance contract liabilities 

at the beginning of the earliest year presented through a series of adjustments that include: 

• Write-off to opening retained earnings of all insurance intangible assets, such as deferred 

acquisition costs or intangible assets recognized upon acquisition of insurance businesses and 

portfolios. 

• Use of the building-blocks approach to restate all of the in-force insurance contracts. Any positive 

or negative difference arising from this restatement would need to be recognized in opening 

retained earnings. No residual margin would be recognized on transition. 

Comments on the ED are due to the FASB by December 15, 2010, unless a respondent would have liked 

to participate in one of the roundtable discussions planned for December 2010, in which case comments 

were due by November 30, 2010. 

Accounting for Costs Associated With Acquiring or Renewing Insurance Contracts 

(EITF Issue 09-G) 

Insurance entities that apply the industry-specific guidance in ASC 944-30 defer and subsequently 

amortize certain acquisition costs incurred during the acquisition of new or renewal contracts. Such costs 

are commonly referred to as deferred acquisition costs (DAC). This Issue addresses the current diversity in 

the types of costs entities included in DAC. 


ASC 944-30-20 defines acquisition costs as those “incurred in the acquisition of new and renewal 

insurance contracts. Acquisition costs include those costs that vary with and are primarily related to the 

acquisition of insurance contracts.” 

While ASC 944-30 gives several examples of costs that would meet the definition of acquisition costs, 

the definition itself is very broad and has led to diversity in practice. The examples in ASC 944-30-55-1 

are agent and broker commissions, salaries of certain employees involved in the underwriting and policy 

issuance functions, and medical and inspection fees. 

At its September 2010 meeting, the Task Force “reached a final consensus that incremental direct 

costs of contract acquisition that are incurred in transactions with both independent third parties and 

employees are deferrable in their entirety.” As a result, the Task Force’s final consensus would allow for 

the capitalization of the following costs that are incurred in the successful acquisition of new and renewal 

insurance contracts: 

• Incremental direct costs of contract acquisition. Incremental direct costs are costs that result 

directly from and are essential to the acquisition of the contract and that the entity would not 

have incurred had that contract transaction not occurred (e.g., commissions to third parties or 

employees). 

• Certain costs that are directly related to the following acquisition activities performed by the 

insurer for the contract: 

o Underwriting. 

o Policy issuance and processing. 

o Medical and inspection. 

o Sales force contract selling. 

The costs related to such activities include (1) only a portion of an employee’s fixed compensation 

and payroll-related fringe benefits directly related to time spent performing such activities for 

actual acquired contracts and (2) other costs directly related to those activities that would not 

have been incurred if the contract had not been acquired. 

• Advertising costs should be included in DAC only if the capitalization criteria for direct-response 

advertising in ASC 340-20 are met. However, direct-response advertising costs capitalized will be 

included in DAC and will be subject to the guidance in ASC 944 on subsequent measurement and 

impairment (premium deficiency). 

This Issue will be effective for fiscal years (and interim periods within those fiscal years) beginning after 

December 15, 2011. Early application will be permitted. At its September 29, 2010, meeting, the Board 

ratified the consensus reached by the Task Force for this Issue. 

Consideration of an Insurer’s Accounting for Majority Owned Investments When 

the Ownership Is Through a Separate Account (EITF Issue 09-B) 

An insurance company often establishes separate accounts that legally protect the contract holder’s 

assets from the company’s general creditors. The contract holders (insured individual or organization) 

typically are given several investment options to choose from (e.g., mutual funds). While the contract 

holders control all investment allocation decisions and are entitled to all returns on the investments (less a 

management fee paid to the insurance company), the insurance company typically has the ability to vote 


any shares on behalf of the contract holders. The insurance company may also have direct investments in 

these same investment funds through interests held in its general account. 

Under ASC 944-80, the insurance company is required to measure the investments within its separate 

accounts at fair value and present these amounts as summary totals, apart from the general accounts of 

the insurance company, on the face of the consolidated statement of financial position if certain criteria 

are met (listed in ASC 944-80-25-3). The predominant current practice is for insurance companies not to 

fully consolidate an investment fund unless the insurance company’s general account has a direct majority 

interest in the investment fund (e.g., a direct interest of more than 50 percent). However, in practice, 

insurance companies often proportionately consolidate any direct investment in an investment fund 

(through the general accounts) if a majority interest in that investment fund is held in combination by both 

the general and separate accounts. 

The Task Force deliberated the following issues in relation to this topic: 

• Whether an insurance company should fully consolidate an investment fund when a majority 

interest is held by the separate accounts or through a combination of its separate accounts and 

general accounts. 

• If the insurance company consolidates an investment fund under this Issue, how the consolidated 

mutual fund should be reflected in the financial statements of the insurer. 

The Task Force decided that an insurer is not required to combine its general account interest with any 

separate account interests when assessing whether the insurer has a controlling financial interest in an 

entity that is not a VIE. Thus, an insurance company would not be required to consolidate an investment 

fund that is not a VIE that is controlled by the separate accounts or through a combination of interests 

held by the general and separate accounts. 

The Task Force also reached a final consensus to expand the scope of this Issue to provide guidance on 

how interest held by a separate account in an investment fund will affect the consolidation assessment 

under Statement 167’s amendments to ASC 810-10 (as amended by ASU 2009-17). The Task Force 

expanded the application of the principle and concluded that in evaluating whether the investment fund is 

a VIE and the insurance entity is the primary beneficiary, the insurance entity should not consider interests 

held through the separate accounts. 

The Task Force also discussed whether additional guidance is needed on how an insurance entity should 

consolidate an investment fund in which the insurance entity owns a controlling financial interest and the 

separate account holders and unrelated third parties also hold equity interests. The Task Force reached a 

final consensus that an insurance entity should consolidate the investment fund by including the portion 

of the fund’s assets that represent the contract holder’s interest as separate account assets and the 

remaining portion of the fund assets, including the portion related to noncontrolling interests, in the 

general account of the insurance entity. An insurance entity would also record a corresponding liability 

for the separate account assets, and the portion related to noncontrolling interest would be included as a 

noncontrolling interest in the equity of the insurance entity, if the equity classification criteria are met. 

This Issue was ratified and is effective for interim and annual periods beginning after December 15, 2010, 

and should be applied retrospectively to all prior periods. Early application is permitted. 


Regulatory Sector Supplement — Insurance 

Regulators Vet Issue of Retained Asset Accounts 

Reacting to a media blitz in recent months about the long-held practice of death benefit payment options, 

the NAIC took steps to improve the disclosure process at its 2010 Summer National Meeting in Seattle. 

Forming a special committee to examine the subject of RAAs, regulators in the NAIC’s new Retained Asset 

Accounts Working Group met to review a practice, which has existed since the 1980s, that allows insurers 

to maintain life insurance policy payouts in interest-bearing, general corporate accounts while distributing 

the proceeds to beneficiaries through a bank-draft-type system linked to low-interest accounts maintained 

in the respective beneficiary’s name. 

At the Retained Asset Accounts Working Group’s August 15, 2010, meeting, ACLI Senior Vice President 

Insurance Regulation & Chief Actuary Paul Graham made it clear that, contrary to what media reports 

have stated, he believes RAAs help beneficiaries by allowing them to postpone making significant financial 

decisions. 

“[RAAs] provide the benefit of time,” Mr. Graham said. “They allow grieving beneficiaries to make financial 

decisions at the time they choose to make them, while providing interest income that compares favorably 

with many other on-demand deposits while that time elapses.” 

A July 2010 report in Bloomberg Markets magazine created a firestorm among public officials, who took 

issue with the practice that has insurers holding and investing approximately $28 billion owed to one 

million beneficiaries. 

In an August 2010 press release, the NAIC noted, “We know there have been relatively few consumer 

complaints about RAAs, but it is our desire to make sure consumers have as many choices as possible 

and that all payment term options are easy to understand,” New Hampshire Insurance Commissioner and 

Retained Asset Accounts Working Group Co-Chairman Roger Sevigny said in a statement. Connecticut 

Insurance Commissioner and Retained Asset Accounts Working Group Co-Chairman Thomas Sullivan 

also indicated that “[they] intend to make sure consumers have appropriate disclosure surrounding these 

benefits.” 

Although the Retained Asset Accounts Working Group took no official action at the meeting, on the day 

the working group met, the NAIC released a Consumer Alert that outlines options the public might take if 

offered the option of an RAA in lieu of a single payment of a death benefit. 

At its 2010 Fall National Meeting in Orlando, the NAIC continued to work on laying the ground rules for 

insurers’ treatment of RAAs. At a meeting of the Retained Asset Accounts Working Group, regulators 

discussed the creation of a model bulletin that could include new mandates and disclosure requirements 

for RAAs. 

The working group discussed the results of a survey of RAA disclosure and claim forms from 13 

companies. The forms were compared to the effective practices outlined in the NAIC’s Retained Asset 

Accounts Sample Bulletin, which dates to 1993. 

The findings of the survey revealed several areas where disclosures could be unclear, including: 

• The portrayal of RAAs as “checkbooks” rather than draft accounts. 

• Failure to indicate where the proceeds are kept (at a bank or kept in a company’s general 

account). 


• Failure to indicate the interest rate to be earned in the initial disclosure form. 

• Failure to clarify whether the funds are FDIC insured. 

• Failure to reference the protection of guaranty fund coverage, when applicable. 

In addition, it was noted that disclosure forms vary widely in length between insurers, and that additional 

disclosures may be needed regarding the proceeds exceeding FDIC and guaranty fund coverage. 

Moving ahead, the Retained Asset Accounts Working Group has charged its subgroup to modify the NAIC 

RAAs Sample Bulletin in light of the survey findings. In addition, the subgroup has also been tasked with 

arriving at suggested language regarding the filing of RAA disclosures with state insurance regulators. 

Solvency Modernization Initiative Roadmap Advances 

During the NAIC’s 2010 Summer National Meeting, the NAIC Solvency Modernization Initiative (SMI) Task 

Force took strides toward examining the current state of the insurance solvency regulatory regime by 

issuing an updated SMI Roadmap. The SMI Roadmap is a concrete work plan that (1) tracks the progress 

of groups within the NAIC that focus on key topics ranging from capital requirements to governance 

and risk management, (2) gives an overall view of progress made, and (3) sets benchmarks for short- and 

long-term goals. 

In an NAIC press release about the SMI Roadmap, Arizona Insurance Director Christina Urias, who chairs 

the SMI Task Force, stated, “This new version of the roadmap builds on the task force’s considerable 

research on solvency structures from all over the world.” 

The SMI kicked off in June 2008, when regulators embarked on a critical self-examination of the U.S. 

insurance solvency regulation framework. The aim of the SMI was to include a review of international 

developments in insurance supervision, banking supervision, and international accounting standards as 

well as their potential use in the United States. The study identified five key areas for further investigation: 

• Capital requirements — Regulators are conducting a holistic evaluation of risk-based capital 

formulas, factors, and methods and considerations related to additional capital assessments. 

• Governance and risk management — Regulators will evaluate the existing U.S. laws, study 

international corporate governance principles and standards, and determine whether such 

principles should be supported through a model law. Regulators will also draft a consultation 

paper discussing risk management reporting and quantification requirements in light of risk 

management supervisory tools being developed around the world that incorporate periodic risk 

reporting, stress tests, and prospective solvency assessment. 

• Group supervision — Regulators will consider incorporating certain prudential features of group 

supervision to provide a window into group operations while building upon the existing walls, 

which provide solvency protection. The concepts include: 

o Communication between regulators. 

o Supervisory colleges. 

o Access to and collection of information. 

o Enforcement measures. 


o Group capital assessment. 

o Accreditation. 

• Statutory accounting and financial reporting — Regulators continue to analyze IASB and FASB 

pronouncements, as well as IFRSs, especially regarding insurance contracts, financial instruments, 

revenue recognition, and reporting. 

• Reinsurance — Regulators will provide guidance on reinsurance evaluation and possible revision 

of the requirements and standards in place for a state insurance department to be NAIC 

accredited. They may also consider whether the modernization of risk transfer requirements 

applicable to life insurance is appropriate. 

With an updated roadmap of the NAIC’s SMI approved at the NAIC’s 2010 Summer National Meeting, 

highlights from the 2010 Fall National Meeting included discussion on group capital assessment and the 

advancement of a draft Model Holding Company Model Act. 

Regarding the topic of group capital assessment, the SMI Task Force is working to set U.S. priorities and 

focus for the IAIS Common Framework for the Supervision of Internationally Active Insurance Groups 

(ComFrame) project. 

There has been industry discussion regarding allowing a company’s enterprise risk management or own 

risk solvency assessment — which requires an insurance company to perform a risk and capital assessment 

and report to the regulator — to serve as an avenue by which group capital is reviewed, rather than by a 

formal group capital calculation. 

Meanwhile, at a meeting of the NAIC’s Group Solvency Working Group, the working group exposed for 

comment its Holding Company and Supervisory College Best Practices paper. The best practices outlined 

in this document encompass a range of issues, including communications between regulators; ownership 

and control as it relates to coordination of form review; and to mergers and acquisitions; standards of 

management of an insurer within a holding company; and affiliated management and service agreements. 

The Group Solvency Working Group also has out for comment its draft Proposal for Substantially Similar 

Provisions of Revised Insurance Holding Company System Model Act and Regulation, which proposes 

provisions states would be required to include in insurance holding company laws or regulations and the 

safe-keeping of the types of holding company information that would be filed to regulators as outlined in 

the law/regulation. 

NAIC Tackles Dodd-Frank Provisions 

With the Dodd-Frank Act serving as an axis for much of the activity at the NAIC’s summer 2010 meeting, 

regulators used the conference to tackle some of the more time-sensitive items on their to-do list. 

Surplus Lines 

One key area that regulators have focused on is the provision to harmonize and streamline surplus lines 

and reinsurance. Under Title IV, the Dodd-Frank Act absorbs the Nonadmitted and Reinsurance Reform 

Act (NRRA) of 2010, which had not been passed in the previous two sessions of Congress. Under the 

law, the home state of the insurer is given the duty of regulating the insurer and collecting taxes. After 

two years, the collection and distribution of premium taxes would be handled by an interstate compact/ 

database that would, on the basis of data submitted by the home states, use a formula to allocate funds 

back to the states accordingly. Beginning two years after the enactment date of the NRRA, states should 


e participating in a producer database of the NAIC or an equivalent uniform national database that is 

used to license surplus lines insurers. As regulators continue to monitor the situation, the NAIC announced 

at its summer 2010 meeting the establishment of a new executive-level task force that is charged with 

developing a state-based solution to the federal demands, including issues related to uniform surplus-linebroker 

licensing and the allocation of surplus lines premium taxes across the states. 

Reinsurance 

The Dodd-Frank Act has partially resolved a long-waged battle by nonadmitted reinsurers over the issue 

of harmonizing regulation and lowering collateral requirements. However, concerns remain about how 

the new provisions will play out. At the NAIC’s 2010 Summer Meeting, regulators on the Reinsurance 

Task Force discussed the issue of amending state accreditation standards to fall in line with the new law. 

To that end, the task force opened for a 30-day comment period (which ended on September 16, 2010) 

a draft about recommendations on key elements of the reinsurance framework to be considered for the 

NAIC state accreditation program. Under NRRA, which will take effect on the one-year anniversary of 

the bill signing, the domiciliary state of a reinsurer would be solely responsible for regulating the financial 

solvency of the company. According to the NAIC, the Dodd-Frank Act does not appear to require singlestate 

licensure. For a ceding insurer to receive credit for reinsurance, the reinsurer would still need to be 

licensed in the ceding insurer’s domiciliary state. The task force will consider amendments to the NAIC’s 

Credit for Reinsurance Model Regulation and its Credit for Reinsurance Model Law so that they more 

closely align with the NAIC’s Reinsurance Regulatory Modernization Framework Proposal. This proposal 

sets up a framework of rating reinsurers and setting collateral limits based on the financial strength of 

a company. Groups such as the Property Casualty Insurers Association of America generally oppose 

reduction in the current collateralization requirements without provisions that would provide equivalent 

credit to U.S. ceding companies. 

Choosing a State Regulator to Be Appointed to the Financial Stability Oversight Council 

As part of their closing business in Seattle, regulators laid out the framework by which one state insurance 

commissioner will be chosen to serve a two-year, nonvoting term on the new FSOC, created under the 

Dodd-Frank Act to evaluate systemic risk in companies. As the financial reform bill was being vetted, 

regulators had fought for the right to be a part of the panel, and they won. Of the 10-member board, 

three members will have insurance expertise, including the director of the new FIO (who has yet to be 

named and who will not have voting rights), a voting member with insurance expertise, and a nonvoting 

state regulator. The Dodd-Frank Act directs the NAIC to choose a sitting insurance regulator to serve a 

two-year term on the FSOC board. As discussed at the NAIC’s 2010 Summer Meeting, the process will 

be similar to an application for employment: it will include an invitation to apply and an explanation of 

qualifications. The selection will be conducted by a committee of NAIC officers who will be charged with 

making recommendations to the NAIC Executive Committee. The final choice will then be in the hands of 

the full NAIC membership. 

Federal Insurance Office 

Although not a major focus of discussion at the NAIC’s 2010 Summer Meeting, another important piece 

of the Dodd-Frank Act is the creation of the first office in the federal government that is focused on 

insurance. The FIO, as established by the U.S. Department of the Treasury, will gather information about 

the insurance industry, including access to affordable insurance products by minorities, low-income and 

moderate-income persons, and underserved communities, and it will serve as a uniform, national voice on 

insurance matters for the United States on the international stage. 


The FIO will also monitor the insurance industry for systemic risk purposes, with limited power to: 

• Recommend insurers that should be treated as systemically important. 

• Assist in administering the Terrorism Risk Insurance Program. 

• Represent the United States in the IAIS. 

• Determine whether state insurance measures are preempted by international agreements. 

The FIO has the authority to: 

• Issue subpoenas to gather information from specific entities. 

• Conduct a study within 18 months of enactment on: 

o Costs and benefits of potential federal regulation of insurance. 

o Feasibility of regulating only certain lines at the federal level. 

o Ability to minimize regulatory arbitrage and developments in the international regulation of 

insurance. 

o Ability of federal regulation to provide robust consumer protection. 

o Potential consequences of subjecting insurance companies to a federal resolution authority. 

The FIO does not have supervisory power over companies. However, the FIO does have the authority 

to obtain information to achieve its objectives. The potential effect on insurance companies is that they 

may be required to provide information and data to the FIO that are not required today and to make 

incremental changes to systems. 

Regulators Offer Insurers Guidelines on STOA Transactions 

The issue of STOA transactions is bubbling up to the NAIC. At the 2010 Fall National Meeting, the NAIC 

Life and Annuities Committee moved to create a subgroup to develop a revised draft of the committee’s 

model bulletin that encourages insurance companies to have safeguards in place to limit potential 

exposure to STOA transactions. The new subgroup will be led by New Jersey Banking and Insurance 

Commissioner Tom Considine and Iowa Deputy Commissioner Jim Mumford. 

The current draft defines STOAs as being similar to stranger-originated life insurance transactions (STOLIs) 

in that they are both driven by agents or investors who offer to pay people unknown to them a fee for 

allowing the use of the person’s identity as the “measuring life” on an investment-oriented annuity. The 

target individuals are usually people who are in poor health and have a life expectancy of less than one 

year. 

The target individuals are often solicited via newspaper advertisements and through nursing homes and 

hospice care facilities. Once the person signs on, they are given certain conditions, such as a bonus rider 

or a guaranteed minimum death benefit. 

Practices can expand to include agents purchasing many policies from a diverse number of companies. To 

avoid detection, agents will often take precautions to ensure that the dollar amount of the annuity falls 

below specific underwriting guidelines. A trust or an organization may also be named as beneficiary of the 

annuity to hide the true identity of those who will benefit from the annuitant’s death. 


As with STOLI transactions, at stake for insurance companies who unwittingly are tied to STOA 

transactions are risks such as reputational risk and legal risk, among others. 

Suggested guidelines for insurance companies included in the model bulletin are as follows: 

• Review chargeback policies to ensure agent commissions are adjusted if a policy is annuitized 

within the first year of the contract. 

• Create detection methods to identify agents who may be involved in the facilitation of STOA 

transactions. 

• Review all annuity applications to ensure specific questions are posed with regard to an 

annuitant’s health status and the manner in which the contract is being funded. 

• Ensure the underwriting department has “red flags” established so questionable applications are 

referred for additional review. 

• Report potential STOA transactions to the appropriate department of insurance. 

Going forward, the committee will consider interested party comments that were due by October 8, 

2010. Revisions of the model bulletin will follow. 


Section 7 

Real Estate Sector Supplement 

Real Estate Accounting Update 

This section discusses recent accounting developments that are of specific interest to real estate 

developers, owners, and operators and should be read in conjunction with Sections 1 and 2, which 

address other key accounting considerations that apply more broadly to financial services entities and may 

be relevant to companies in the real estate sector. 

Leases 

On August 17, 2010, the FASB and IASB published for public comment an ED on leases. For a number 

of years, the two boards have been actively working on revising the lease accounting model to address 

off-balance-sheet treatment of operating leases. Many believed that GAAP lease accounting was too 

reliant on bright-line tests and offered entities the opportunity to structure arrangements to produce 

a desired accounting effect, which often led entities to account for economically similar transactions 

differently. Although much criticism of lease accounting was directed toward lessees’ accounting, the ED 

also proposes to fundamentally change the accounting for leases by lessors. 

The FASB is separately considering a project on investment properties that may cause lessors of real estate 

to be outside the scope of the new lease accounting guidance (see the Investment Properties section 

below for more information about this project). The proposed leasing guidance will still affect tenants 

(including lessees of real estate property). Thus, as a result of changes to lessee behavior, certain business 

changes and challenges may arise that could affect owners of rental properties regardless of whether they 

are within the scope of the new lease accounting standard. 

With limited exceptions, the ED would require that all leases be presented on the balance sheet of both 

lessors and lessees. The ED has two different lessor accounting models: the performance obligation 

approach and the derecognition approach. To determine which accounting model to apply, the lessor 

evaluates whether it retains exposure to significant risks or benefits associated with the leased asset. If 

exposure to significant risks or benefits associated with the leased asset is retained, the performance 

obligation approach is used. Most real estate companies that lease property to multiple tenants are likely 

to follow the performance obligation approach. Manufacturers and dealers of assets that use leasing as a 

mechanism to sell the asset would typically use the derecognition approach. 

Performance Obligation Approach 

Under the performance obligation model, the leased asset would remain on the lessor’s books and 

continue to be depreciated. The lessor would recognize (1) an asset for the right to receive lease payments 

plus any recoverable initial direct costs incurred by the lessor and (2) a corresponding lease liability at the 

present value of the lease payments. The underlying asset, the right to receive lease payments, and the 

lease liability would be presented together in the statement of financial position, with a total for the net 

lease asset or net lease liability. A lessor would amortize the lease liability to income on a straight-line basis 

or by using another systematic and rational approach. The interest method would be used to recognize 

interest income on the receivable, resulting in a decrease in income over the term of the lease. Lessors 

would be required to reassess the expected lease payments in each reporting period and would adjust the 

receivable prospectively if new facts or circumstances (e.g., revised tenant sales projections resulting in 

revised expected contingent rent projections, changes in the expected lease term) indicate that there is a 

significant change in the right to receive rental payments. Changes in current- and prior-period contingent 

rents would be recognized in the current-period income statement, while changes in future contingent 

rents would result in adjustments to the recorded asset and obligation. All changes in expected lease 

terms are adjusted with respect to the lease asset and lease liability. 

Section 7: Real Estate Sector Supplement 119

Under the performance obligation approach, rental income (which is typically recognized on a straightline 

basis under the current model) would be replaced by (1) interest income on the receivable (declining 

as the receivable balance is reduced) and (2) lease income as the lease performance obligation liability 

is satisfied (typically on a straight-line basis) over the lease term. The proposed guidance requires lessors 

to present the income statement components separately, but a “net lease income” subtotal of the leaserelated 

amounts should be presented on the income statement. Further, under the performance obligation 

approach, leases with increasing step rent payments will result in increased cash flows to lessors coupled 

with decreased net rental income during the lease term. Many lessors believe this accounting result does 

not accurately reflect the substance of their lease agreements with tenants. 

Derecognition Approach 

Under the derecognition approach, a portion of the leased asset is removed from the lessor’s books. 

The lessor records (1) a receivable (and lease income) for the present value of expected rental payments 

and (2) a residual asset representing the right to the underlying asset at the end of the lease term. Lease 

expense would be recognized for the portion of the leased asset that is removed from the lessor’s books, 

calculated as of the date of inception of the lease as follows: 

Fair value of the right to receive lease payments ÷ fair value of the underlying asset 

Section 7: Real Estate Sector Supplement 120 

× 

Carrying amount of the underlying asset 

Although the lessor recognizes income and expense upon lease commencement, the amount of up-front 

profit (or loss) recognized may be different from that recognized under a sales-type lease under current 

U.S. GAAP. This is due to the ED’s guidance related to contingent rentals, residual value guarantees, 

and other elements of lease contracts (including the calculation of the residual asset), which differ from 

current guidance. The lessor would use the interest method to amortize the receivable and recognize 

interest income. As of each reporting date, the lessor would reassess its expected lease payments if new 

facts or circumstances indicate a significant change in the right to receive lease payments. This model 

is expected to be used primarily by manufacturers, dealers, and banks that use leases as a mechanism 

to sell assets or to earn financing income; in most cases it will not apply to real estate companies with 

multitenant properties. 

Investment Properties 

The FASB has announced a project to converge the guidance on investment properties under U.S. GAAP 

with IAS. Under this project, the Board is considering whether entities should be given the option (or 

be required) to measure an investment property at fair value through earnings. IAS 40 provides such an 

option. The project may include its own lease accounting model, which an entity would use when it 

carries its investment properties at fair value. As a result, investment properties accounted for at fair value 

could be outside the scope of the new lease guidance. 

The FASB’s definition of an investment company was originally expected to be generally consistent with 

that under IAS 40, which states that “property (land or a building — or part of a building — or both) held 

(by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, 

rather than for: (a) use in the production or supply of goods or services or for administrative purposes; or 

(b) sale in the ordinary course of business.” However, the FASB has indicated that it believes that the fair 

value measurement provisions for investment property should be required (rather than optional as under 

IAS 40).

The FASB has been conducting outreach recently to various constituents to better understand which 

entities would be affected by the potential investment property guidance and whether certain entities or 

properties should be excluded from the fair value measurement requirement. The outreach results have 

been mixed, with some constituents in support of a requirement to measure investment property at fair 

value (believing that it is the most relevant measurement attribute) and others opposed to it. Constituents 

cited concerns about (1) the relevance of a fair value measurement when reporting entities do not intend 

to sell the property, (2) the cost and effort involved in developing a fair value measurement, and (3) the 

potential for earnings volatility that will not be realized. The Board has asked the staff to consider whether 

there are alternative ways to define the scope the investment property project. 

Under IAS 40, owner-occupied property is not considered investment property. When evaluating whether 

an asset is owner-occupied or investment property, entities must consider the significance of ancillary 

services provided to the tenants of the property. If ancillary services are an insignificant component of 

the arrangement as a whole (e.g., the building owner supplies security and maintenance services to the 

lessees), then the entity may treat the property as investment property. However, when the ancillary 

services provided are significant (such as those provided at a hotel or certain health care properties), the 

property would be classified as owner-occupied and thus would not be considered investment property. 

As a result, some real estate owners could be required to measure some of their real estate assets at fair 

value (as investment property) and others at historical cost (as owner-occupied assets), depending on 

the significance of the ancillary services provided. Many believe that this is an undesirable mixed model 

and have asked the FASB to consider revising its definition of investment properties to include hotels and 

health care properties. 

The real estate community is awaiting the FASB’s decision about investment property accounting. Its 

decision will determine whether entities need to focus on the requirements and impact of fair value 

reporting in addition to the effects of the new lease accounting guidance. 

Revenue Recognition 

As discussed in Section 1, the FASB and the IASB have jointly developed and issued an ED on revenue 

recognition. While the ED does not apply specifically to real estate, it will supersede the guidance on sales 

of real estate in ASC 360-20. As a result, industry-specific guidance will be replaced with a “one-sizefits-all” 

model based on principles rather than on the rules that govern real estate sales today. 

Specific elements of the new revenue recognition model that will affect the real estate industry are: 

• The elimination of bright-line tests for assessing adequacy of the buyer’s initial investment. 

• Uncertainties about the collectability of sales prices will affect the measurement of revenue but 

not necessarily the recognition of revenue. 

• Sellers will need to use judgment in assessing the significance of continuing involvement and its 

impact on revenue recognition. 

• An assessment is required of whether a transfer of control has occurred in the determination of 

whether a sale can be recognized. 


Impairment 

Real estate owners and operators have recorded and may continue to record material impairment charges. 

As a result, identifying, measuring, recording, and disclosing impairments remain relevant issues in the real 

estate sector. 

Impairment Disclosures 

In light of the impairment disclosure requirements in ASC 360-10-50-2 and ASC 820-10-50-5, the SEC 

staff has frequently requested that registrants provide robust disclosure of the (1) facts and circumstances 

that led to impairment, (2) the valuation technique and inputs registrants used in determining fair value, 

and (3) the level of the input used within the fair value hierarchy. Such disclosures might include: 

• The specific facts and circumstances that occurred during the current period that resulted in 

the identification of an impairment indicator and the determination that the property tested for 

impairment was not recoverable. 

• The extent of involvement of third-party specialists (appraisers) in determining fair value. 

• The extent of reliance on internally developed models in the fair value estimates. 

• The specific discount rates, or range of rates, used. 

• A sensitivity analysis of the impact of changes to key assumptions. 

Early-Warning Disclosures 

The timing of impairment charges continues to be frequently challenged by regulators and others, so 

early-warning disclosures in MD&A should be thorough and specific if there are potential losses on the 

horizon. We understand that the SEC staff will continue to ask for more disclosures in MD&A about what 

the conditions that resulted in impairments mean to the registrant’s business as well as for more forwardlooking 

information about the risk of future impairments. Any known trends or uncertainties that entities 

reasonably expect to result in a material impact on impairment losses before the actual charges are 

announced should be disclosed as soon as they are known. 

Long-Lived Assets Under Development 

While a property is under development, entities use the “held-and-used” model to evaluate potential 

impairment. Under the held-and-used model, an impairment loss is recognized when the carrying amount 

of the long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived 

asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the 

use and the eventual disposition of the asset. 

Once a long-lived asset being developed for sale is completed and ready for sale in its current condition, 

the reporting entity uses the “held-for-sale” model to evaluate the assets for impairment. Under the 

held-for-sale impairment model, an impairment loss must be recognized if the carrying amount of the 

long-lived asset exceeds its fair value less cost to sell. Because of the different models, it is possible for 

long-lived assets under development to be deemed not impaired until completion and then, immediately 

upon completion, become impaired and require a write-down. As a result, the SEC staff has asked 

developers to provide early-warning disclosures if current sales transactions indicate that the projected 

carrying amount of properties under development is expected to exceed their fair values less costs to sell 

once the project is completed. 


Appendix A 

Abbreviations 

Abbreviation Description 

ABS asset-backed securities 

AICPA American Institute of Certified Public Accountants 

APR annual percentage rate 

ARM adjustable rate mortgage 

ASC FASB Accounting Standards Codification 

ASU FASB Accounting Standards Update 

ATM automated teller machine 

AUM assets under management 

CAQ Center for Audit Quality (affiliated with the AICPA) 

C&DI SEC Compliance and Disclosure Interpretation 

CDO collateralized debt obligation 

CFE collateralized financing entity 

CFO chief financial officer 

CLO collateralized loan obligation 

CP commercial paper 

DAC deferred acquisition cost 

DP discussion paper 

EAP Expert Advisory Panel 

ED exposure draft 

EIR effective interest rate 

EITF FASB’s Emerging Issues Task Force 

EPS earnings per share 

ERM enterprise risk management 

FAQ frequently asked question 

FAS Financial Accounting Standard 

FASB Financial Accounting Standards Board 

FDIC Federal Deposit Insurance Corporation 

FINRA Financial Industry Regulatory Authority 

FIO Federal Insurance Office 

Appendix A: Abbreviations 123

FSOC Financial Stability Oversight Council 

FV-NI fair value through net income 

FV-OCI fair value through other comprehensive income 

FVO fair value option 

GAAP generally accepted accounting principles 

GIPS global investment performance standards 

HAMP Home Affordable Modification Program 

IAIS International Association of Insurance Supervisors 

IARD Investment Advisory Registration Depository 

IAS International Accounting Standards 

IASB International Accounting Standards Board 

ICFR internal control over financial reporting 

IFRS International Financial Reporting Standard 

IIPRC Interstate Insurance Product Regulation Commission 

LSA loss-sharing arrangement 

MD&A Management’s Discussion and Analysis 

NAIC National Association of Insurance Commissioners 

NASD National Association of Securities Dealers 

NAV net asset value per share 

NCI noncontrolling interest 

NEO named executive officer 

NIPR National Insurance Producer Registry 

NMS national market system 

NRRA Nonadmitted and Reinsurance Reform Act 

NRSRO nationally recognized statistical rating organizations 

NYSE New York Stock Exchange 

OCI other comprehensive income 

OREO other real estate owned 

ORSA own risk solvency assessment 

OTC over the counter 


OTTI other-than-temporary impairment 

PAC political action committee 

PCAOB Public Company Accounting Oversight Board 

PPACA Patient Protection and Affordable Care Act 

QSPE qualifying special-purpose entity 

RAA retained asset account 

SAS Statement on Auditing Standard 

SEC Securities and Exchange Commission 

SERFF System for Electronic Rate and Form Filing 

SIC IASB’s Standing Interpretations Committee 

SIPC Securities Investor Protection Corporation 

SIV structured investment vehicle 

SMI NAIC Solvency Modernization Initiative 

SPE special-purpose entity 

SRO self-regulatory organization 

STAT stranger-originated annuity transaction 

STOA science and technology options assessment 

STOLI stranger-originated life insurance transaction 

TDR troubled debt restructuring 

TIS AICPA Technical Questions and Answers 

TPA Technical Practice Aid 

UPB unpaid principal balance 

VIE variable interest entity 

VRG Valuation Resource Group 

XBRL eXtensible Business Reporting Language 


Appendix B 

Glossary of Topics, Standards, and Regulations 

Readers seeking additional information about the topics discussed in this publication and other activities 

of key standard-setters and regulators may find information on the following Web sites: 

• The FASB Web site at www.fasb.org 

• The SEC Web site at www.sec.gov 

• The PCAOB Web site at www.pcaobus.org 

• The AICPA Web site at www.aicpa.org 

• The IFRS Web site at www.ifrs.org 

The following represents a listing of technical resources used in drafting this document: 

FASB Accounting Standards Codification Topic 310, Receivables 

FASB Accounting Standards Codification Subtopic 310-10, Receivables: Overall 

FASB Accounting Standards Codification Subtopic 310-20, Receivables: Nonrefundable Fees and Other 

Costs 

FASB Accounting Standards Codification Subtopic 310-30, Receivables: Loans and Debt Securities 

Acquired With Deteriorated Credit Quality 

FASB Accounting Standards Codification Subtopic 310-40, Receivables: Troubled Debt Restructurings by 

Creditors 

FASB Accounting Standards Codification Subtopic 320-10, Investments — Debt and Equity Securities: 

Overall 

FASB Accounting Standards Codification Topic 323, Investments — Equity Method and Joint Ventures 

FASB Accounting Standards Codification Subtopic 340-20, Other Assets and Deferred Costs: Capitalized 

Advertising Costs 

FASB Accounting Standards Codification Topic 360, Property, Plant, and Equipment 

FASB Accounting Standards Codification Subtopic 360-10, Property, Plant, and Equipment: Overall 

FASB Accounting Standards Codification Subtopic 360-20, Property, Plant, and Equipment: Real Estate 

Sales 

FASB Accounting Standards Codification Topic 405, Liabilities 

FASB Accounting Standards Codification Topic 460, Guarantees 

FASB Accounting Standards Codification Topic 470, Debt 

FASB Accounting Standards Codification Subtopic 470-50, Debt: Modifications and Extinguishments 

FASB Accounting Standards Codification Subtopic 470-60, Debt: Troubled Debt Restructurings by Debtors 

FASB Accounting Standards Codification Subtopic 480-10, Distinguishing Liabilities From Equity: Overall 

Appendix B: Glossary of Topics, Standards, and Regulations 126

FASB Accounting Standards Codification Topic 718, Compensation — Stock Compensation 

FASB Accounting Standards Codification Subtopic 718-10, Compensation — Stock Compensation: Overall 

FASB Accounting Standards Codification Topic 805, Business Combinations 

FASB Accounting Standards Codification Subtopic 805-20, Business Combinations: Identifiable Assets and 

Liabilities, and Any Noncontrolling Interest 

FASB Accounting Standards Codification Subtopic 805-30, Business Combinations: Goodwill or Gain From 

Bargain Purchase, Including Consideration Transferred 

FASB Accounting Standards Codification Subtopic 805-10, Business Combinations: Overall 

FASB Accounting Standards Codification Topic 810, Consolidation 

FASB Accounting Standards Codification Subtopic 810-10, Consolidation: Overall 

FASB Accounting Standards Codification Topic 815, Derivatives and Hedging 

FASB Accounting Standards Codification Subtopic 815-10, Derivatives and Hedging: Overall 

FASB Accounting Standards Codification Subtopic 815-15, Derivatives and Hedging: Embedded Derivatives 

FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures 

FASB Accounting Standards Codification Subtopic 820-10, Fair Value Measurements and Disclosures: 

Overall 

FASB Accounting Standards Codification Topic 825, Financial Instruments 

FASB Accounting Standards Codification Subtopic 825-10, Financial Instruments: Overall 

FASB Accounting Standards Codification Topic 840, Leases 

FASB Accounting Standards Codification Topic 850, Related Party Disclosures 

FASB Accounting Standards Codification Subtopic 850-10, Related Party Disclosures: Overall 

FASB Accounting Standards Codification Topic 855, Subsequent Events 

FASB Accounting Standards Codification Subtopic 855-10, Subsequent Events: Overall 

FASB Accounting Standards Codification Topic 860, Transfers and Servicing 

FASB Accounting Standards Codification Subtopic 860-10, Transfers and Servicing: Overall 

FASB Accounting Standards Codification Subtopic 942-320, Financial Services — Depository and Lending: 

Investments — Debt and Equity Securities 

FASB Accounting Standards Codification Topic 944, Financial Services — Insurance 

FASB Accounting Standards Codification Subtopic 944-30, Financial Services — Insurance: Acquisition 

Costs 


FASB Accounting Standards Codification Subtopic 944-80, Financial Services — Insurance: Separate 

Accounts 

FASB Accounting Standards Codification Topic 946, Financial Services — Investment Companies 

FASB Accounting Standards Codification Subtopic 946-10, Financial Services — Investment Companies: 

Overall 

FASB Accounting Standards Update No. 2010-20, Disclosures About the Credit Quality of Financing 

Receivables and the Allowance for Credit Losses 

FASB Accounting Standards Update No. 2010-18, Effect of a Loan Modification When the Loan Is Part of 

a Pool That Is Accounted for as a Single Asset 

FASB Accounting Standards Update No. 2010-11, Scope Exception Related to Embedded Credit 

Derivatives 

FASB Accounting Standards Update No. 2010-10, Amendments for Certain Investment Funds 

FASB Accounting Standards Update No. 2010-09, Amendments to Certain Recognition and Disclosure 

Requirements 

FASB Accounting Standards Update No. 2010-06, Improving Disclosures About Fair Value Measurements 

FASB Accounting Standards Update No. 2010-01, Accounting for Distributions to Shareholders With 

Components of Stock and Cash 

FASB Accounting Standards Update No. 2009-17, Improvements to Financial Reporting by Enterprises 

Involved With Variable Interest Entities 

FASB Accounting Standards Update No. 2009-16, Accounting for Transfers of Financial Assets 

FASB Accounting Standards Update No. 2009-15, Accounting for Own-Share Lending Arrangements in 

Contemplation of Convertible Debt Issuance or Other Financing 

FASB Accounting Standards Update No. 2009-12, Investments in Certain Entities That Calculate Net Asset 

Value per Share (or Its Equivalent) 

Proposed FASB Accounting Standards Update, Accounting for Financial Instruments and Revisions to the 

Accounting for Derivative Instruments and Hedging Activities 

Proposed FASB Accounting Standards Update, Amendments for Common Fair Value Measurement and 

Disclosure Requirements in U.S. GAAP and IFRSs 

Proposed FASB Accounting Standards Update, Clarifications to Accounting for Troubled Debt 

Restructurings by Creditors 

Proposed FASB Accounting Standards Update, Disclosure of Certain Loss Contingencies 

Proposed FASB Accounting Standards Update, Revenue From Contracts With Customers 

Proposed FASB Accounting Standards Update, Statement of Comprehensive Income 

FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R) 


FASB Statement No. 166, Accounting for Transfers of Financial Assets — an Amendment of FASB 

Statement No. 140 

FASB Statement No. 157, Fair Value Measurements 

FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments 

of Liabilities — a Replacement of FASB Statement No 125 

FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities 

FASB Statement No. 130, Reporting Comprehensive Income 

FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities — an Interpretation of ARB No. 

51 

EITF Issue No. 09-G, “Accounting for Costs Associated With Acquiring or Renewing Insurance Contracts” 

EITF Issue No. 09-E, “Accounting for Stock Dividends, Including Distributions to Shareholders With 

Components of Stock and Cash” 

EITF Issue No. 09-B, “Consideration of an Insurer’s Accounting for Majority-Owned Investments When 

Ownership Is Through a Separate Account” 

EITF Issue No. 09-1, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible 

Debt Issuance” 

SEC Regulation S-X, Rule 3A-02, “Consolidated Financial Statements of the Registrant and Its Subsidiaries” 

SEC Regulation S-K, Item 10(e), “Use of Non-GAAP Financial Measures in Commission Filings” 

SEC Regulation S-K, Item 303, “Management’s Discussion and Analysis of Financial Condition and Results 

of Operations” 

SEC Final Rule Release No. 34-63241, Risk Management Controls for Brokers or Dealers With Market 

Access 

SEC Final Rule Release No. 34-62184A, Amendment to Municipal Securities Disclosure 

SEC Final Rule Release No. 34-61595, Amendments to Regulation SHO 

SEC Final Rule Release No. 33-9142, Internal Control Over Financial Reporting in Exchange Act Periodic 

Reports of Non-Accelerated Filers (effective September 21, 2010) 

SEC Final Rule Release No. 33-9134, Notice of Solicitation of Public Comment on Consideration of 

Incorporating IFRS Into the Financial Reporting System for U.S. Issuers 

SEC Final Rule Release No. 33-9133, Notice of Solicitation of Public Comment on Consideration of 

Incorporating IFRS Into the Financial Reporting System for U.S. Issuers 

SEC Final Rule Release No. 33-9072, Internal Control Over Financial Reporting in Exchange Act Periodic 

Reports of Non-Accelerated Filers 

SEC Final Rule Release No. IA-3060, Amendments to Form ADV 


SEC Final Rule Release No. IA-3043, Political Contributions by Certain Investment Advisers 

SEC Final Rule Release No. IA-2968, Custody of Funds or Securities of Clients by Investment Advisers 

SEC Final Rule Release No. IC-29132, Money Market Fund Reform 

SEC Proposed Rule Release No. 34-62445, Elimination of Flash Order Exception From Rule 602 of 

Regulation NMS 

SEC Proposed Rule Release No. 34-61902, Proposed Amendments to Rule 610 of Regulation NMS 

SEC Proposed Rule Release No. 33-9150, Issuer Review of Assets in Offerings of Asset-Backed Securities 

SEC Proposed Rule Release No. 33-9148, Disclosure for Asset-Backed Securities Required by Section 943 

of the Dodd-Frank Wall Street Reform and Consumer Protection Act 

SEC Proposed Release Rule No. 33-9143, Short-Term Borrowings Disclosure 

SEC Proposed Rule Release No. 33-9117, Asset-Backed Securities 

SEC Proposed Rule Release No. IA-1862, Electronic Filing by Investment Advisers; Proposed Amendments 

to Form ADV 

SEC Interpretive Release No. 33-9144, Commission Guidance on Presentation of Liquidity and Capital 

Resources Disclosures in Management’s Discussion and Analysis 

Securities Exchange Act of 1934, Rule 15c3-1, “Net Capital Requirements for Brokers or Dealers” 

Financial Industry Regulatory Authority (FINRA) Rule 4110, “Capital Compliance” 

Valuation Resource Group (VRG) Issue No. 2010-01, “FASB/IASB’s Joint Project on Fair Value Measurement 

and Disclosure” 

Office of Thrift Supervision, Thrift Bulletin 85, “Regulatory and Accounting Issues Related to Modifications 

and Troubled Debt Restructurings of 1-4 Residential Mortgage Loans” 

IFRS 4, Insurance Contracts 

IFRS 7, Financial Instruments: Disclosures 

IFRS 9, Financial Instruments 

IAS 27, Consolidated and Separate Financial Statements 

IAS 32, Financial Instruments: Presentation 

IAS 39, Financial Instruments: Recognition and Measurement 

IAS 40, Investment Property 

SIC-12, Consolidation — Special Purpose Entities 

IASB Exposure Draft ED10, Consolidated Financial Statements 

IASB Exposure Draft ED/2009/3, Derecognition: Proposed Amendments to IAS 39 and IFRS 7 


FASB Accounting Standards Codification 

General Principles 

105 – Generally Accepted Accounting Principles 

Presentation 

205 – Presentation of Financial Statements 

210 – Balance Sheet 

215 – Statement of Shareholder Equity 

220 – Comprehensive Income (FAS 130) 

225 – Income Statement 

230 – Statement of Cash Flows (FAS 95) 

235 – Notes to Financial Statements 

250 – Accounting Changes and Error Corrections (FAS 154) 

255 – Changing Prices 

260 – Earnings per Share (FAS 128) 

270 – Interim Reporting (APB 28) 

272 – Limited Liability Entities 

274 – Personal Finance Statements 

275 – Risks and Uncertainties 

280 – Segment Reporting (FAS 131) 

Financial Statement Line Item 

Assets 

305 – Cash and Cash Equivalents 

310 – Receivables 

320 – Investments — Debt and Equity Securities (FAS 115) 

323 – Investments — Equity Method and Joint Ventures 

(APB 18) 

325 – Investments — Other 

330 – Inventory 

340 – Other Assets and Deferred Costs 

350 – Intangibles — Goodwill and Other (FAS 142) 

360 – Property, Plant, and Equipment (FAS 144) 

Liabilities 

405 – Liabilities 

410 – Asset Retirement and Environmental Obligations (FAS 

143) 

420 – Exit or Disposal Cost Obligations (FAS 146) 

430 – Deferred Revenue 

440 – Commitments 

450 – Contingencies (FAS 5) 

460 – Guarantees (FIN 45) 

470 – Debt 

480 – Distinguishing Liabilities From Equity (FAS 150) 

Appendix B: Glossary of Topics, Standards, and Regulations 131 

Equity 

505 – Equity 

Revenue 

605 – Revenue Recognition 

Expenses 

705 – Cost of Sales and Services 

710 – Compensation — General 

712 – Compensation — Nonretirement Postemployment 

Benefits (FAS 112) 

715 – Compensation — Retirement Benefits (FAS 87; 88; 

106; 112; 132(R); 158) 

718 – Compensation — Stock Compensation (FAS 123(R)) 

720 – Other Expenses 

730 – Research and Development (FAS 2) 

740 – Income Taxes (FAS 109/FIN 48) 

Broad Transactions 

805 – Business Combinations (FAS 141(R)) 

808 – Collaborative Arrangements 

810 – Consolidation (FIN 46(R)/ARB 51/FAS 160) 

815 – Derivatives and Hedging (FAS 133) 

820 – Fair Value Measurements and Disclosures (FAS 157) 

825 – Financial Instruments (FAS 159) 

830 – Foreign Currency Matters (FAS 52) 

835 – Interest 

840 – Leases (FAS 13) 

845 – Nonmonetary Transactions (APB 29) 

850 – Related Party Disclosures 

852 – Reorganizations 

855 – Subsequent Events (FAS 165) 

860 – Transfers and Servicing (FAS 140) 

Industry 

905 – Agriculture 

908 – Airlines 

910 – Contractors — Construction 

912 – Contractors — Federal Government 

915 – Development Stage Entities 

920 – Entertainment — Broadcasters 

922 – Entertainment — Cable Television

924 – Entertainment — Casinos 

926 – Entertainment — Films 

928 – Entertainment — Music 

930 – Extractive Activities — Mining 

932 – Extractive Activities — Oil and Gas 

940 – Financial Services — Broker and Dealers 

942 – Financial Services — Depository and Lending 

944 – Financial Services — Insurance 

946 – Financial Services — Investment Companies 

948 – Financial Services — Mortgage Banking 

950 – Financial Services — Title Plant 

952 – Franchisors 

954 – Health Care Entities 

956 – Limited Liability Entities 

958 – Not-for-Profit Entities 

960 – Plan Accounting — Defined Benefit Pension Plans 

962 – Plan Accounting — Defined Contribution Pension 

Plans 

965 – Plan Accounting — Health and Welfare Benefit Plans 

970 – Real Estate — General 

972 – Real Estate — Common Interest Realty Associations 

974 – Real Estate — Real Estate Investment Trusts 

976 – Real Estate — Retail Land 

978 – Real Estate — Time-Sharing Activities 

980 – Regulated Operations 

985 – Software 

995 – U.S. Steamship Entities 


Appendix C 

Deloitte Specialists and Acknowledgments 

U.S. Financial Services Industry 

Jim Reichbach | Vice Chairman, Financial Services | Deloitte LLP 

+1 212 436 5730 | jreichbach@deloitte.com 

Susan L. Freshour | Financial Services Industry Professional Practice Director | Deloitte & Touche LLP 

+1 212 436 4814 | sfreshour@deloitte.com 

Howard Kaplan | Financial Instrument Valuation and Securitization Leader | Deloitte & Touche LLP 

+1 212 436 2163 | hkaplan@deloitte.com 

Tom Omberg | Financial Accounting and Reporting Services Leader | Deloitte & Touche LLP 

+1 212 436 4126 I tomberg@deloitte.com 

Kevin McGovern | Governance, Risk and Regulatory Consulting Services Leader | Deloitte & Touche LLP 

+1 617 437 2371 | kmcgovern@deloitte.com 

Rhoda Woo | Financial Services Industry Enterprise Risk Leader | Banking and Securities Enterprise 

Risk Leader | Deloitte & Touche LLP 

+1 212 436 3388 | rwoo@deloitte.com 

Asset Management Industry 

Cary Stier | Practice Leader, Asset Management Services | Deloitte & Touche LLP 

+1 312 486 3274 | cstier@deloitte.com 

Rob Fabio | Asset Management Industry Professional Practice Director | Deloitte & Touche LLP 

+1 212 436 5492 | rfabio@deloitte.com 

Brian Gallagher | Asset Management Industry Professional Practice Director | Deloitte & Touche LLP 

+1 617 437 2398 | bgallagher@deloitte.com 

Donna Glass | Asset Management Enterprise Risk Leader | Deloitte & Touche LLP 

+1 212 436 6408 | dglass@deloitte.com 

Banking and Securities Industry 

Bob Contri | Practice Leader, Banking and Securities Industry | Deloitte LLP 

+1 212 436 2043 | bcontri@deloitte.com 

Chris Donovan | Securities Industry Professional Practice Director | Deloitte & Touche LLP 

+1 212 436 4478 | chrdonovan@deloitte.com 

Dipti Gulati | Securities Industry Professional Practice Director | Deloitte & Touche LLP 

+1 212 436 5509 | dgulati@deloitte.com 

Hugh Guyler | Banking and Finance Companies Industry Professional Practice Director | 

Deloitte & Touche LLP 

+1 212 436 4848 | hguyler@deloitte.com 

Jim Mountain | Banking and Finance Companies Industry Professional Practice Director | 

Deloitte & Touche LLP 

+1 212 436 4742 | jmountain@deloitte.com 

Appendix C: Deloitte Specialists and Acknowledgments 133

Insurance Industry 

Rebecca C. Amoroso | Practice Leader, Insurance Services | Deloitte LLP 

+1 973 602 5385 | ramoroso@deloitte.com 

Mark Parkin | Insurance Enterprise Risk Leader | Deloitte & Touche LLP 

+1 212 436 4761 | mparkin@deloitte.com 

Don Schwegman | Insurance Industry Professional Practice Director | Deloitte & Touche LLP 

+1 513 784 7307 | dschwegman@deloitte.com 

Rick Sojkowski | Insurance Industry Professional Practice Director | Deloitte & Touche LLP 

+1 860 725 3094| rsojkowski@deloitte.com 

Real Estate Industry 

Bob O’Brien | Practice Leader, Real Estate Services | Deloitte LLP 

+1 312 486 2717 | robrien@deloitte.com 

Chris Dubrowski | Real Estate Industry Professional Practice Director | Deloitte & Touche LLP 

+1 203 708 4718 | cdubrowski@deloitte.com 

Jim Berry | Real Estate Enterprise Risk Leader | Deloitte & Touche LLP 

+1 214 840 7360| jiberry@deloitte.com 

Acknowledgments 

We would like to thank the following Deloitte professionals for contributing to this document: 

Teri Asarito 

Karen Bartos 

Bryan Benjamin 

Mark Bolton 

Damien Browne 

Hilary Cabodi 

Lynne Campbell 

Erin Carberry 

Melissa Card 

Clayton Chandler 

Danielle Chase 

Janet Cuccinelli 

Mike Chung 

Amy Diehl 

Joe DiLeo 

Chris Donovan 

Chris Dubrowski 

David Elizandro 

Carolyn Estrada 

Rob Fabio 

Susan Freshour 

Brian Gallagher 

Irena Gecas-McCarthy 

Gina Greer 

Jesselyn Greiner 

Dipti Gulati 

Dmitriy Gutman 

Hugh Guyler 

George Hanley 

Rich Hildebrand 

Derek Hodgdon 

Lyndsey Hoehn 

Sherrelle Jemmott 

Steve Joyce 

Robert Jurinek 

Elizabeth Kim 

Joanna Klocek 

Elizabeth Krentzman 

Katie Kuperus 

Ken Loo 

Tania Lynn 

Jim May 

Adrian Mills 

Jim Mountain 

Rob Moynihan 


Samuel Mulliner 

Jeff Nickell 

Magnus Orrell 

Jeanine Pagliaro 

Kirtan Parikh 

Jay Regan 

Joseph Renouf 

Lynne Robertson 

Yvonne Rudek 

John Sarno 

Patrick Scheibel 

Don Schwegman 

Khalid Shah 

Shahid Shah 

Vicki Shekhtmeyster 

Rick Sojkowski 

Andrew Spooner 

Anastasia Traylor 

Mark Trousdale 

Adam Vanfossen 

Ping Wang 

Wes Yeomans 


Appendix D 

Other Resources 

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Appendix D: Other Resources 136

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2010 Accounting, Financial Reporting, and Regulatory Update

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